INTERNATIONAL MONETARY FUND

REGIONAL
ECONOMIC
OUTLOOK
EUROPE

Europe’s Balancing Act: Taming

Inflation without a Recession

2023
APR
World Economic and Financial Surveys

REGIONAL
ECONOMIC
OUTLOOK
EUROPE

Europe’s Balancing Act: Taming

Inflation without a Recession

2023
APR
Copyright ©2023 International Monetary Fund

Cataloging-in-Publication Data
IMF Library

Names: International Monetary Fund, publisher.

Title: Regional economic outlook. Europe’s balancing act : taming inflation without a recession.
Other titles: Europe’s balancing act : taming inflation without a recession. | Taming inflation without a recession.
| World economic and financial surveys. | Regional economic outlook : Europe.
Description: Washington, DC : International Monetary Fund, 2023. | World economic and financial surveys. |
Apr. 2023. | Includes bibliographical references.
Identifiers: ISBN:
9798400238154 (paper)
9798400238178 (epub)
9798400238208 (Web PDF)
Subjects: LCSH: Economic forecasting—Europe. | Economic development—Europe. | Economic
conditions—Europe.
Classification: LCC HC240.A1 R445 2023

The Regional Economic Outlook: Europe is published twice a year, in the spring and fall, to review devel-
opments in Europe. Both projections and policy considerations are those of the IMF staff and do not
necessarily represent the views of the IMF, its Executive Board, or IMF Management.

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 Contents iii

Contents
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Europe’s Balancing Act: Taming Inflation without a Recession. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Europe Has So Far Avoided an All-Out Recession. . . …. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
… But Core Inflation Remains High … . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
… And Recent Financial Market Stress Is Adding Headwinds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Europe’s Outlook: Slow Recovery, Sticky Inflation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Growth and Inflation Risks Continue to Cloud Europe’s Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Policies: Acting Decisively Now to Avoid a Hard Landing Later. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Monetary Policy: Keeping a Tight(er) Stance for Longer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Financial Policies: Reaffirming Financial Stability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Fiscal Policies: Taking Advantage of Recent Fiscal Windfalls to Consolidate at a Faster Pace. . . . . . . . . . . . . . . . . 15
Structural Policies: Easing Growth-Inflation Trade-offs by Enhancing Labor Supply and Energy Security. . . . 16
References.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

BOXES
Box 1. Recent Economic Developments in Russia and Ukraine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Box 2. Türkiye: The Macroeconomic Impact of the Recent Earthquakes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Box 3. Risks to Housing Markets and Household and Bank Balance Sheets in Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Box 4. Spillovers of European Central Bank Monetary Policy on Emerging European Economies. . . . . . . . . . . . . . . 24
Box 5. What Does the Taylor Rule Say about the Stance of Monetary Policy across Europe?. . . . . . . . . . . . . . . . . . . . . 26
Box 6. The State of the European Banking Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

FIGURES
Figure 1. Recent Economic Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Inflation and Labor Market Indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Figure 3. Growth Tailwinds.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 4. Europe: The Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 5. Financial and Banking Stress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 6. Asymmetric Rise in Sovereign Spreads.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 7. Distribution of Inflation Expectations for 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 8. Risk Factors: Energy Prices and Geopolitical Fragmentation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 9. EU Trade Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 10. Monetary Policy: Keeping a Tight Stance for Longer.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 11. The Benefits of Monetary Policy Acting Sooner Rather than Later.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 12. Costs and Benefits of Alternative Policies to Support Households in an Adverse Scenario. . . . . . . . . . . 13
Figure 13. Fiscal Developments .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Figure 14. Energy Security and Green Transition.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Box Figure 1.1. Russia: Crude Exports, All Destinations.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Box Figure 2.1. Türkiye: Contributions to Estimated Growth Impact from Earthquakes. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Box Figure 3.1. Europe: Evolution of Real House Prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

April 2023  •  INTERNATIONAL MONETARY FUND

iv REGIONAL ECONOMIC OUTLOOK—Europe

Box Figure 3.2. Europe: Mortgage Debt at Risk .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Box Figure 3.3. Europe: Bank Capital Depletion from Household Balance Sheet Stress Scenarios. . . . . . . . . . . . . . 22
Box Figure 4.1 Impact of ECB Monetary Tightening on Emerging European Economies.. . . . . . . . . . . . . . . . . . . . . . . . . 24
Box Figure 4.2 Spillovers to Emerging European Economies of Alternative ECB Tightening Policies. . . . . . . . . . . 25
Box Figure 6.1. Europe: Common Equity Tier 1 Ratio, 2022:Q3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Box FIgure 6.2. Europe: Bank Liquidity Coverage Ratio, 2022:Q3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Box Figure 6.3. Wholesale Funding in Euro Area Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Box Figure 6.4. NPLs and Stage 2 Loans in Euro Area Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

TABLES
Annex Table 1.1 Real GDP Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Annex Table 1.2. Headline Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

INTERNATIONAL MONETARY FUND  •  April 2023

 April 2023 Regional Economic Outlook: Europe v

April 2023 Regional Economic Outlook: Europe

Emerging market economies

Euro area
Other advanced economies

SWE

ISL

FIN

NOR

EST

LVA
DNK RUS
LTU

IRL BLR
UK NLD POL
DEU
BEL
LUX CZE UKR
SVK
AUT MDA
FRA CHE HUN
SVN HRV ROU
ITA BIH SRB
SMR
MNE KOS BGR
AND MKD
PRT ESP ALB
GRC
TUR

MLT
CYP

ISR

Note: The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the International Monetary Fund, any
judgment on the legal status of any territory or any endorsement or acceptance of such boundaries. In this report, country abbreviations are International
Organization for Standardization country codes. UK = United Kingdom.

April 2023  •  INTERNATIONAL MONETARY FUND

 Executive Summary vii

Executive Summary
Europe faces the difficult task of simultaneously bringing down inflation, sustaining economic growth, and
preserving financial stability, as it grapples with the fallout of the energy crisis triggered by Russia’s invasion of
Ukraine and the aftermath of the COVID-19 pandemic. While declining, inflation remains very high. Growth has
tumbled since the middle of last year as inflation lowered households’ real incomes. An all-out recession was
avoided this winter thanks to sharply lower energy prices and government relief measures. Following the fastest
tightening in decades, monetary policy is starting to bite, and financial sector risks have materialized.

Europe’s outlook is one of slow growth and sticky inflation. Supply forces—lower energy prices, easing supply
bottlenecks—should provide tailwinds. Meanwhile, gradually easing demand headwinds—improving household
purchasing power, some unwinding of the tightening of financial conditions later next year—should support a
slow recovery. Annual growth is expected to rebound in 2024—from 0.7 percent in 2023 to 1.4 percent in 2024
in advanced European economies, and from 1.1 to 3.0 percent in emerging European economies (excluding
Belarus, Russia, Türkiye, and Ukraine). Average inflation is projected to decline to 5.6 percent in 2023 and 3.0
percent in 2024 in advanced European economies, and to 11.7 percent in 2023 and 5.5 percent in 2024 in
emerging European economies. Revisions with respect to the October 2022 forecasts are small for advanced
European economies, while they are on the downside for growth and on the upside for inflation in emerging
European economies.

This outlook comes with severe and interconnected risks. Failure to contain financial stability risk could lead to
crisis and lower growth. While tighter macroeconomic policies could add to financial sector worries, failure to
act forcefully now—as assumed—to bring down inflation could mean higher inflation later, forcing even greater
than projected policy tightening and an economic downturn. At the same time, tight labor markets, a resurgence
of energy prices, or fragmentation risks could bring lower growth and higher inflation. This will further compli-
cate the task of European policymakers.

To succeed in taming sticky inflation while avoiding financial stress and a recession, macroeconomic, financial,
and structural policies need to work in concert. Tight(er) monetary policy is needed to bring inflation down deci-
sively to central bank targets. Further increases in policy rates are required in the euro area, while central banks
in emerging European economies should stand ready to tighten further where real rates are low, labor markets
are tight, and underlying inflation persistence is high. A tighter stance is also a desirable response to high uncer-
tainty around economic slack and inflation persistence. Financial sector liquidity risks should be addressed
primarily through central banks’ well-established lender-of-last-resort role.

Maintaining financial stability across markets and bank and nonbank financial institutions will require close
monitoring, contingency planning, and prompt corrective action. In the European Union, stability could be
bolstered by extending the reach of bank resolution tools, clarifying the availability of the Single Resolution
Fund’s resources, ratifying the European Stability Mechanism’s amended treaty, and agreeing on a pan-Euro-
pean deposit insurance. Macroprudential policies should maintain or increase buffers as needed. Measures to
help households cope with rising interest rates should be targeted and well-designed. Forced conversions from
flexible- to fixed-rate mortgages at below market rates and regulatory forbearance should be avoided.

Governments should pursue more ambitious fiscal consolidation. Tighter fiscal policy would support monetary
policy in the fight against inflation, helping central banks meet their objectives at lower interest rates, with
positive spillovers for public debt service costs and financial stability. It would also restore depleted fiscal space
and governments’ ability to cope with large future shocks.

April 2023  •  INTERNATIONAL MONETARY FUND

viii REGIONAL ECONOMIC OUTLOOK—Europe

Structural reforms should prioritize easing growth-inflation trade-offs. Raising female and older workers’ labor
force participation and enhancing job matching would reduce labor market tensions. In the European Union,
progress on implementing the Recovery and Resilience Plans and the Capital Markets Union could unlock invest-
ments needed to raise crisis-hit productive capacity, achieve the European Union’s climate goals, and enhance
energy security. Subsidies to green industries should be limited in scope and well-targeted and minimize distor-
tions to international trade and the single market.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 1

Europe’s Balancing Act: Taming

Inflation without a Recession
Inflation remains very high, but economic growth has slowed rapidly as some financial sector risks have
materialized and Europe continues to grapple with the fallout from the energy crisis caused by Russia’s
invasion of Ukraine and the pandemic. The expected recovery in the course of the year assumes that policy-
makers manage to keep financial stress contained and tame inflation without a recession. Given still tight
labor markets, monetary policy will need to remain contractionary until inflation subsides decisively. Fiscal
consolidation will need to become more decisive. Financial stability could be tested again, and policymakers
should closely monitor developments, identify weaknesses, and take swift action where needed. Beyond the
short term, the scars that the COVID-19 and energy crises have left on potential output require structural
reforms to boost labor supply and ensure energy security by accelerating the ongoing green transition.
These reforms would sustainably expand Europe’s productive capacity and reduce price pressures in the
medium term.

Europe Has So Far Avoided an All-Out Recession . . .

Europe is facing the difficult task of bringing down inflation, sustaining economic growth, and maintaining
financial stability, as the economy adjusts to the consequences of the energy crisis triggered by Russia’s invasion
of Ukraine and the aftermath of the COVID-19 pandemic (Figure 1, panel 1).

GDP growth across Europe has slowed significantly. Activity decelerated sharply in the second half of 2022 as
inflation lowered real incomes, monetary tightening started to bite, and growth slowed in key trading partners.
A few advanced European economies are expected to post negative sequential GDP growth in the first quarter of
2023. Some emerging European economies already experienced technical recessions—at least two consecutive
quarters of negative GDP growth—in 2022. The weakness was broad-based, with both private consumption and
investment cooling (Figure 1, panel 2). High-frequency surveys suggest that activity remains subdued, although
there are tentative signs that growth may have bottomed out (Figure 1, panel 3).

Economic activity would have been even weaker if energy prices had not dropped and supply-chain bottlenecks
eased. The warm winter alleviated natural gas shortages by lowering demand (Figure 1, panel 4), and weaker
economic activity outside Europe (especially in China) freed up global liquified natural gas supply. Proactive
policies helped at both ends by improving infrastructure, increasing imports and inventories, and improving
demand efficiency. By early 2023, natural gas and electricity prices had dropped to about half of their 2022
averages. In addition, the unwinding of global supply chain problems eased price pressures through lower
shipping costs and more readily available inputs.

Energy relief measures also supported activity. Toward the end of the year, most advanced and many emerging
European economies rolled out broad-based measures to help households and firms cope with the cost-of-living
crisis, blunting the contractionary effects of the phasing out of COVID-19-related support measures and robust
tax revenue growth driven in part by higher inflation. As a result, aggregate fiscal consolidation in advanced
European economies fell short of the projections in the October 2022 World Economic Outlook. On average,
fiscal positions deteriorated in emerging European economies.

1
This chapter was prepared by Gabriel Di Bella, Agustin Roitman, and Sebastian Weber, with contributions from Chikako Baba, Luis
Brandao Marques, Geoffroy Dolphin, Gianluigi Ferrucci, Shakill Hassan, Ting Lan, Claire Li, Grace Li, Aiko Mineshima, Vina Nguyen, Ben
Park, Manasa Patnam, Alex Pienkowski, Frederik Toscani, and Laura Valderrama, under the supervision of Helge Berger and Romain
Duval. Agnesa Zalezakova provided administrative support. It reflects data and developments as of March 30, 2023.

April 2023  •  INTERNATIONAL MONETARY FUND

2 REGIONAL ECONOMIC OUTLOOK—Europe

Figure 1. Recent Economic Developments

1. Euro Area: Consumer Confidence’s Double Dip 2. GDP Growth Contributions

(Seasonally adjusted, percent balance) (Quarter-over-quarter annualized percent change contribution
to GDP, seasonally adjusted)
0 Private consumption Government consumption
–5 Investment Net exports
Statistical discrepancy GDP
–10 14 14
12 12
–15 10 10
8 8
–20 6 6
4 4
–25 2 2
0 0
–30 –2 –2
–4 –4
–35 –6 –6
Jan. Jan. Jan. Feb. 2021:Q1 22:Q1 22:Q4 2021:Q1 22:Q1 22:Q4
2020 21 22 23 Advanced European economies Emerging European economies

3. Euro Area: PMI Indices 4. European Union: Natural Gas Storage, 2015–23
(Diffusion index, seasonally adjusted, 50+ = expansion) (Percent of capacity)
70 100
90
60 80
50 70
56%
60
40 50
Weather effect +17% 40
30 Composite PMI 30
Manufacturing output 20
20 Services Max–Min 2022–23 Average
10
10 0
Jan. Jul. Jan. Jul. Jan. Jul. Mar.
Apr. 2022

May 22

June 22

July 22

Aug. 22

Sep. 22

Oct. 22

Nov. 22

Dec. 22

Jan. 23

Feb. 23

Mar. 23

Apr. 23
2020 20 21 21 22 22 23

Sources: Bruegel; European Commission; Eurostat; Haver Analytics; and IMF staff calculations.
Note: In panel 4, maximum and minimum values are calculated using 2015–20 values. Advanced European economies includes Austria,
Belgium, Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Latvia,
Lithuania, Luxembourg, Malta, the Netherlands, Norway, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, and the United
Kingdom. Emerging European economies includes Albania, Bosnia and Herzegovina, Bulgaria, Hungary, Kosovo, North Macedonia, Moldova,
Montenegro, Poland, Romania, and Serbia. PMI = purchasing managers’ index.

… But Core Inflation Remains High …

Inflation remains significantly above target across Europe (Figure 2, panel 1). By end 2022, falling commodity
prices and easing supply-chain bottlenecks contributed to a sharp downward turn in headline inflation (for
example, in Belgium, Greece, The Netherlands, and Spain). But core inflation surprised on the upside and
continued increasing to double-digit levels in several advanced European economies (the Baltics, Czech
Republic) and emerging European economies (Bulgaria, Hungary, North Macedonia, Poland; Figure 2, panel 2).
Lower energy prices will ease underlying inflation pressures in the months ahead, but, on their own, will not be
enough to bring inflation back down to central bank targets (Figure 2, panel 6). Moreover, inflation expectations
have increased relative to a year ago and remain above target in several economies (Hungary, Poland).

Tight labor markets and a buildup of wage pressures have fueled core inflation. Vacancy-to-unemployment
ratios remain near record highs in the euro area and broadly in line with their pre-COVID-19 heights in emerging
European economies (Figure 2, panel 3). Employment and hours worked are back to pre-pandemic levels in most
cases. More broadly, many European economies are operating at close to or above full capacity. Average output
gaps across advanced European economies, including the euro area, are estimated to have turned positive in

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 3

Figure 2. Inflation and Labor Market Indicators

1. Headline Inflation 2. Core Inflation

(Percent change, three-month moving average of (Percent change, three-month moving average of
month-over-month annualized) month-over-month annualized)
35 25
EUR AE Select EE EUR AE Select EE
30
20
25
20 15
15
10
10
5 5
0
0
–5
–10 –5
Jan. Oct. July Apr. Jan. Feb. Jan. Oct. July Apr. Jan. Feb.
2019 19 20 21 22 23 2019 19 20 21 22 23

3. Labor Market Tightness 4. Euro Area: Indicators of Wages and Salaries

(Vacancies per unemployed, seasonally adjusted, (Year-over-year percent change)
2015:Q1 = 100)
Wages and salaries per hour (national accounts)
500 12
EA Select EE Hourly labor costs: wages and salaries
450 10
400 8
350 6
300
4
250
200 2
150 0
100 Negotiated wages –2
50 Indeed job tracker –4
0 –6
2019:Q1 20:Q2 21:Q3 23:Q1
2019:Q1

19:Q3

20:Q1

20:Q3

21:Q1

21:Q3

22:Q1

22:Q3
22:Q4

5. Prices and Wages 6. Core Inflation and External Price Shocks

(Index, 2021:Q1 = 100) (Quarter over quarter, percent change; seasonally
adjusted annualized)
125 14 14
AE headline prices Food and energy
120 EE headline prices 12 Other 12
AE nominal wage per hour 10 AE core inflation 10
115 EE nominal wage per hour 8 EE core inflation 8
110 6 6
105 4 4
2 2
100 0 0
95 –2 –2
2019:Q1

19:Q4

20:Q3

21:Q2

22:Q3
22:Q4

2019:Q1

20:Q1

21:Q1

22:Q1

23:Q1

23:Q4

2019:Q1

20:Q1

21:Q1

22:Q1

23:Q1

23:Q4

Advanced European economies Emerging European economies

Sources: Haver Analytics; Indeed, Wage Tracker; IMF, World Economic Outlook database; and IMF staff calculations.
Note: In panel 3, select emerging European economies on the right subpanel includes Bulgaria, Hungary, Poland, and Romania; euro
area excludes Malta due to a lack of data. In panel 6, contributions and projections are calculated based on the dynamic simulations of
country-by-country Phillips curve regressions. AE = advanced European economies; EE = emerging European economies; EUR =
Europe.

2022. Excluding Belarus, Russia, Türkiye, and Ukraine, emerging European economies recorded even higher
positive output gaps in 2022 than in 2021. Against this backdrop, it is not surprising that nominal wage growth
has picked up. In emerging European economies, nominal wages kept up with double-digit headline inflation,
reinforcing core inflation pressures. In advanced European economies, especially in the euro area, nominal
wages have increased more slowly than inflation, but the implied drop in real wages is fueling workers’ demands
for more raises, pointing to a risk of sustained high core inflation ahead (Figure 2, panels 4 and 5).

April 2023  •  INTERNATIONAL MONETARY FUND

4 REGIONAL ECONOMIC OUTLOOK—Europe

… And Recent Financial Market Stress Is Adding Headwinds

Financial conditions have broadly tightened across European economies. Even before the recent increase in
financial market stress, expectations of higher policy rates and shrinking central bank balance sheets had lifted
longer-term bond yields and turned bank lending standards more restrictive. As interest rates rose, however, so
did tensions in some corners of financial markets. In the fall of last year, market turmoil in the United Kingdom
following the announcement of a deficit-increasing fiscal package revealed financial vulnerabilities among
nonbank financial institutions (NBFIs), forcing the Bank of England to intervene to restore orderly market condi-
tions. In March, banking sector stress in the United States spilled over to Europe, causing sharp declines in
banks’ equity prices. In some emerging European economies, exchange rate pressure increased (for example,
Hungary). While decisive actions by the authorities in Switzerland reduced immediate contagion risks from the
feared failure of Credit Suisse, financial market risk levels remain elevated. As a result, overall financing condi-
tions are likely to remain tighter than they would otherwise have been. This holds despite the fact that markets
have somewhat pared back expectations of monetary tightening following these events (for example, in the euro
area and United Kingdom).

Europe’s Outlook: Slow Recovery, Sticky Inflation

This Regional Economic Outlook: Europe assumes that policymakers will continue to act to lower inflation, alle-
viating the need for a sharper tightening and deeper economic slowdown later. This implies that several central
banks, including the European Central Bank (ECB), will tighten further and/or keep a restrictive stance for an
extended period, some mild fiscal consolidation will proceed, and any renewed bouts of financial stress will
remain contained. Another key assumption underpinning the projections is no further escalation of the war in
Ukraine and associated sanctions, which will allow energy and other commodity prices to continue falling in line
with April 2023 World Economic Outlook projections.2

Supply tailwinds and a gradual easing of ongoing demand headwinds should support a gradual recovery in
activity starting in the course of 2023, leading to a rebound in annual growth in 2024. In 2023, subdued real
wages, tight financial conditions, and soft external demand will weigh on economic activity. But as inflation
drops, growth in the United States and China picks up, and financial conditions start easing during the second
half of 2024, these headwinds should gradually ease. Meanwhile, on the supply side, declining energy prices
and easing supply bottlenecks (Figure 3, panel 1) will continue to underpin economic activity. Moreover, fiscal
consolidation will be less ambitious than expected in last October’s Regional Economic Outlook: Europe in both
advanced and emerging European economies, limiting the associated drag on growth (Figure 3, panel 2).

Overall, GDP growth in 2023 is forecast to decline to 0.7 percent in advanced European economies and to 1.1
percent in emerging European economies (excluding Belarus, Russia, Türkiye, and Ukraine) before rebounding
to 1.4 percent and 3.0 percent in 2024, respectively. This implies upward revisions of about 0.1 percentage
point in 2023 and downward revisions of 0.3 percentage point in 2024 in advanced European economies and
larger downward revisions of 0.5 and 0.4 percentage point in emerging European economies, compared to the
October 2022 Regional Economic Outlook: Europe (Figure 4). Private demand deceleration in 2023 is projected
to be particularly sizable in Hungary and Poland among emerging European economies and in Austria, Cyprus,
Greece, Iceland, Slovenia, and the United Kingdom among advanced European economies. Some of the largest
European economies (France, Germany, Italy) are projected to experience weak or negative quarterly sequential
growth in 2023, with some facing technical recessions (for example, Sweden and the United Kingdom).

2
Western governments imposed far-reaching financial and trade sanctions, including a ban of imports of oil and gas by the European
Union, the United Kingdom, and the United States and a price cap on oil exports to third countries, some of which entered into force in
late 2022 and early 2023.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 5

Figure 3. Growth Tailwinds

1. Energy Prices and Supply Bottlenecks 2. Fiscal Stance Measure over Time
(Index, 2019 = 100; percent balance, 50+ = expansion) (Percent of potential GDP)
2,500 85 1.0
EA4 electricity AE Oct. 2022 WEO
2,250 TTF natural gas 80 EE Oct. 2022 WEO 2024 0.5

Fiscal impulse (percentage point)

Supplier’s delivery time AE Apr. 2023 WEO
2,000 (% balance, right scale) 75 EE Apr. 2023 WEO
1,750 0
70
2024
1,500 2023 –0.5
65 2023
1,250
60 2024 2023 –1.0
1,000
2024
55
750 –1.5
500 50
–2.0
250 45
2023
0 40 –2.5
–1.0 –0.8 –0.6 –0.4 –0.2 0.0
Mar. 2022

Apr. 22

May 22

June 22

July 22

Aug. 22

Sep. 22

Oct. 22

Nov. 22

Dec. 22

Jan. 23

Feb. 23

Mar. 23 Output gap (percent)

Sources: Bloomberg Finance L.P.; IMF, World Economic Outlook database; and IMF staff calculations.
Note: In panel 1, percent balance above 50 indicates longer delivery times. In panel 2, the changes in fiscal policies are inversed to show
positive values as expansionary policies and negative values as contractionary policies; fiscal impulse is the change in cyclically adjusted
primary deficit excluding grants; advanced European economies excludes Norway, and emerging European economies includes Bosnia and
Herzegovina, Bulgaria, Hungary, Poland, and Romania. EA4 includes France, Germany, Italy, and Spain. AE = advanced European economies;
EE = emerging European economies; TTF = Title Transfer Facility; WEO = World Economic Outlook.

In Ukraine, following a collapse of 30 percent in GDP in 2022, high-frequency indicators suggest that activity has
stabilized early in 2023, and it is projected to remain broadly flat (Box 1). However, the war and the massive loss of
social and economic infrastructure along with large outward migration creates uncertainty around the forecast.

In Türkiye, the powerful earthquakes in February

came with severe human and material cost. The Figure 4. Europe: The Outlook
resulting disruption of economic activity will (Percent)
lower GDP growth this year, followed by higher Current Projection Revision2
growth supported by reconstruction activity next 2022 2023 2024 2023 2024
year (Box 2).
Real GDP Growth

After contracting in 2022, Russia’s GDP will grow Europe 2.7 0.8 1.7 0.2 –0.3
slowly in 2023, still supported by last year’s large Advanced European Economies 3.6 0.7 1.4 0.1 –0.3
acceleration in deficit-financed public spending. Euro Area 3.5 0.8 1.4 0.3 –0.4
However, the medium-term outlook is for very
Emerging European Economies 1
4.4 1.1 3.0 –0.5 –0.4
low growth, as many links to the global economy
remain severed and potential output is perma- CPI Inflation (avg)

nently reduced (Box 1). Europe 15.2 10.4 6.3 –0.2 1.2

Advanced European Economies 8.4 5.6 3.0 –0.6 0.1

Lower commodity prices and the normalization
Euro Area 8.4 5.3 2.9 –0.4 0.2
of supply disruptions will drive headline inflation
down, but core inflation is projected to stay high Emerging European Economies 1
14.1 11.7 5.5 –0.3 1.4

for longer. Average headline inflation in 2023

Source: IMF staff calculations.
is now forecast to reach 5.6 and 11.7 percent in Note: CPI = consumer price index.
advanced and emerging European economies 1
Excludes Belarus, Russia, Türkiye, and Ukraine.
2
Revision with respect to October 2022 Regional Economic Outlook:
(excluding Belarus, Russia, Türkiye, and Ukraine), Europe.
respectively, a downward revision of 0.6 and 0.3

April 2023  •  INTERNATIONAL MONETARY FUND

6 REGIONAL ECONOMIC OUTLOOK—Europe

Figure 5. Financial and Banking Stress

1. Overall and Banks Equity Prices 2. Five-Year European G-SIBs CDS Spreads
(Index; 2019 = 100) (Basis points)
180 US: overall stock index HSBC Barclays BNP Paribas
US: bank index Deutsche Bank Groupe Crédit Agricole
Europe: overall stock index ING Bank Banco Santander Société Générale
160
Europe: bank index Standard UBS UniCredit
Chartered Credit Suisse (right scale)
140 300 1,200

250 1,000
120
200 800
100
150 600
80
100 400

60 50 200

40 0 0
Jan. July Jan. Jan. Feb. Mar.
Dec. 2019
Jan. 20
Mar. 20
May 20
July 20
Sep. 20
Nov. 20
Jan. 21
Mar. 21
May 21
July 21
Sep. 21
Nov. 21
Jan. 22
Mar. 22
May 22
July 22
Sep. 22
Nov. 22
Jan. 23
Mar. 23

2019 20 22 2023 23 23

Sources: Bloomberg Finance L.P.; and IMF staff calculations.

Note: CDS = credit default swap; G-SIBs = global systemically important banks.

percentage point from the October 2022 Regional Economic Outlook: Europe, respectively. In contrast, core
inflation is projected to increase from 5.1 percent in 2022 to 5.6 percent on average in 2023 in advanced European
economies and from 10.6 percent to 12.5 percent in emerging European economies (excluding Belarus, Russia,
Türkiye, and Ukraine) before declining to 3.1 and 7.0 percent in 2024, respectively. Across the region, the cooling
of core inflation is predicated on the ongoing policy tightening and its lagged impact on activity, the pass-
through from lower energy and food prices, and the continued easing of supply-chain bottlenecks. However,
largely reflecting lower current inflation rates, smaller second-round effects on wages, better anchored inflation
expectations, and lower exchange rate depreciation, inflation in advanced European economies is projected to
return to target by 2025 or 2026, earlier than most emerging European economies.

Growth and Inflation Risks Continue to Cloud Europe’s Outlook

The baseline forecast comes with severe and interconnected risks. New financial sector concerns have emerged,
and failure to contain financial stability risks could lead to crisis and lower growth. While tighter macroeconomic
policies could add to financial sector worries, failure to act forcefully now to bring down inflation, as assumed in
the baseline, could mean higher inflation later, forcing greater-than-projected policy tightening going forward.
At the same time, a resurgence of energy prices or fragmentation risks could bring lower growth and higher
inflation, further complicating the task of European policymakers.

Financial Sector Risks

Risks of financial distress among banks and nonbanks have come to the fore. While comfortable average capital
and liquidity buffers among banks in the euro area and the United Kingdom provide a cushion (Box 6), the recent
banking sector problems illustrate how liquidity strains and financial stress can surface abruptly in an environ-
ment of higher interest rates after 15 years of highly accommodative monetary policy (Figure 5). Another stress
episode could erode buffers, especially among banks with weaker fundamentals, and sharply tighten credit and

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 7

Figure 6. Asymmetric Rise in Sovereign Spreads

1. Fiscal Balance and Spreads 2. Gross Financing Needs

(Basis points and percent of GDP) (Percent of GDP)
AE External debt
Change in weighted average spreads

250 25
EE Domestic debt
(Dec. 2021 to Dec. 2022 bps)

Gross financing requirements

200 20

150 15

100 10

50 5

0 0
–10 –5 0 5 ALB MKD ROU HRV MNE POL SRB BGR
General government net lending (percent of GDP)

3. Impulse Response of EE Financial Conditions to an ECB 4. ULC and Trade Balance Adjustments
Monetary Shock (Percentage change, 2021–22)

Percent change of trade balance (Jan.–Nov.)

(Percent)
3 15 2
IRL SVN 1
2 10 0
NLD FIN LUX –1
1 5
FRA DEU AUT –2
BEL –3
0 0 ESP
SVK EST –4
–1 –5 PRT ITA –5
LVA –6
10-year government bond –7
–2 –10 GRC
Exchange rate (right scale) LTU –8
–3 –15 –9
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 –10 –5 0 5 10
Quarters Percent change of REER ULC based (Jan.–Nov.)

Sources: Global Data Source; Haver Analytics; Monetary and Capital Markets Department, Sovereign Spread Monitor; IMF, World Economic
Outlook database; and IMF staff calculations.
Note: In panel 1, weighted average spread is the par value–weighted spread across all of a country’s bonds with more than one year remaining
maturity. In panel 3, shaded areas refer to confidence bands around estimates, and the x-axis reflects the quarter after the initial shock. Country
abbreviations are International Organization for Standardization country codes. AE = advanced European economies; bps = basis points; ECB
= European Central Bank; EE = emerging European economies; REER = real effective exchange rate; ULC = unit labor cost.

broader financial conditions. The ensuing deterioration in the outlook and increase in lending rates would likely
reduce asset quality and raise provisioning needs, further affecting bank balance sheets and tightening credit
conditions, which in turn would further weaken activity. Such a scenario could also trigger capital outflows and
hit emerging European economies disproportionately. Several NBFIs with long-dated asset portfolios, including
some pension funds, have been under acute deleveraging pressures that could intensify should long-term
interest rates rise significantly further. These and other maturity risks would be amplified if inflation proves to be
more persistent than markets expect, triggering a sudden downward adjustment in bond prices.

Disorderly corrections in real estate markets could occur even if broader financial distress is avoided. A housing
market correction is already underway in some European countries—for instance, in the Czech Republic, Denmark,
as well as in Sweden where house prices declined more than 6 percent in 2022. House price declines could
accelerate if markets reprice inflation risks and financial conditions tighten more than expected. These price
declines would have adverse effects on household and bank balance sheets (Box 3).

April 2023  •  INTERNATIONAL MONETARY FUND

8 REGIONAL ECONOMIC OUTLOOK—Europe

Finally, an asymmetric rise in sovereign bond

Figure 7. Distribution of Inflation Expectations for
yields amid broader market stress could
2023
(Percent, Consensus Forecasts) reignite economic divergence across European
economies. Looking across Europe, sovereign
25
Forecast in Mar. 2023 range spreads in countries with weaker fiscal positions
Forecast in Mar. 2022 range
20 Forecast in Mar. 2023 average have risen in both advanced and emerging
Forecast in Mar. 2022 average European economies, with particularly large
15 increases in the latter (Figure 6, panel 1). Debt
composition and large financing requirements
10 add to vulnerabilities in several emerging
European economies (Figure 6, panel 2). A spike
5 in global risk aversion or other sources of broad
market stress could have a sizable impact on the
0
sovereign spreads and exchange rates of these
–5
economies. Spreads could also be affected by
faster-than-expected ECB monetary tightening
CHE
ESP
NOR
NLD
FRA
EA
DEU
ITA
SVN
HRV
SWE
UK
EST
LVA
LTU
BGR
SVK
ROU
CZE
POL
HUN
(Box 4). For example, based on historical evidence,
Source: Consensus Forecasts. a 100 basis point ECB monetary policy rate
Note: Inflation expectations is the average year-over-year inflation surprise might raise 10-year government yields in
produced by Consensus Forecasts. Country abbreviations are
International Organization for Standardization country codes. emerging European economies by more than 150
basis points, with larger effects in economies with
weaker fundamentals (Figure 6, panel 3). A likely
more remote risk is a resurgence of acute sovereign bond yield pressures within the euro area. Finally, the energy
price shock triggered major inflation divergence across countries, resulting in large real effective exchange rate
shifts and trade balance adjustments across member economies (Figure 6, panel 4). If underlying inflation diver-
gence persists, external imbalances could widen, and, over time, risks of bond yield spikes in economies with
weaker fundamentals could increase.

Inflation Risks
High and divergent inflation could persist for longer than expected if energy prices were to spike again, inflation
expectations drifted upward, or wage growth picked up more than projected. Any combination of factors—such
as a harsh 2023–24 winter, insufficient demand compression, the discontinuation of remaining Russian gas flows,
or a pickup of liquified natural gas demand from China—could lead to renewed energy price spikes. Despite
some recent decline, expected inflation for 2023 is higher than it was a year ago, and it is also subject to a wide
divergence in views (Figure 7). Furthermore, a new bout of inflation could surface if wage- and price-setting
behavior became more backward-looking, with workers and firms seeking greater compensation for recent
price and wage increases, respectively (as described in Chapter 2 of the October 2022 Regional Economic
Outlook: Europe). Minimum wage hikes tracked core inflation closely last year, with risks that such increases
could propagate through the pay scale, increasing inflation persistence.

Another factor pointing to inflation risks is evidence that economic slack in many European economies may be
even smaller than estimated after back-to-back shocks left long-lasting scars on Europe’s productive capacity (Li
and Di Bella, forthcoming). Historically, economic slack has been often overestimated in real time, particularly
during recovery periods (Figure 8, panels 1 and 2). The confluence of supply and demand shocks makes it even
harder to assess slack at the current juncture. This raises a risk that many European economies might be running
to a greater extent above capacity than currently estimated for this Regional Economic Outlook: Europe. For
instance, long COVID-19 is thought to have durably increased the number of workdays lost because of sickness
which, along with other factors (such as shifting worker preferences away from working long hours after COVID-
19), affects labor supply negatively (Figure 8, panel 3). Moreover, futures prices suggest that long-term European
energy prices may be up to 40 percent higher than before the pandemic, reflecting the shift to liquified natural

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 9

Figure 8. Risk Factors: Energy Prices and Geopolitical Fragmentation

1. Output Gaps: Real time versus t + 1 2. Variation in Output Gap Estimates

(Percent) (Percent; standard deviation)
0.4 2.0
Recovery
1.8
Recovery: t + 1
1.6
0.3
1.4
1.2
0.2 1.0
0.8
0.6
0.1
0.4
0.2
0.0 0
–5 –4 –3 –2 –1 0 1 2 3 4 5 All years Recovery years Year 2022

3. Lost Hours Because of Sickness 4. Potential Output Loss Because of Energy Price Shock
(Loss until 2022:Q1 in percent of 2019 labor force) (Deviation from no-shocks scenario in 2027)
0.0 0.0
–0.2
–0.4
–0.5 –0.6
–0.8
–1.0
–1.0 –1.2
–1.4
–1.6
–1.5 –1.8
PRT DEU UK FRA FIN ESP ITA BEL DEU-ITA average EA19 ESP-FRA average

Sources: Eurostat; IMF, World Economic Outlook database; and IMF staff calculations.
Note: In panel 1, recovery is a three-year period after the individual country’s recession; distribution shows the kernel density of the output gap
difference between the real-time and the ex post estimates. In panel 3, excess sickness leave is estimated based on the overall working hours
deficit (usual versus actual hours) relative to the pre-pandemic level in 2019; the proportion of sickness leave in the overall deficit is proxied
from French administrative data on sickness declarations. In panel 4, the no-shock scenario assumes an absence of price shocks; the energy
price shock scenario corresponds to the commodity price path forecast in the October 2022 World Economic Outlook. The estimates are based
on an endogenous technical change model with energy as an input, allowing for energy efficiency to increase in respond to price changes (see
Lan and others, forthcoming). Country abbreviations are International Organization for Standardization country codes. EA = euro area.

gas and other adjustments. European firms have improved energy efficiency in response to higher prices, but
persistently higher energy prices reduce potential output, especially in the near term when fixed costs make
substitution away from fossil fuels harder. While the adoption of energy-saving technologies over the medium
term is more feasible, the average potential output decrease because of higher medium-term energy prices
is assessed at more than 1 percentage point in most European countries, reaching more than 1.5 percent on
average in Germany and Italy, for example (Figure 8, panel 4).3

Fragmentation Risks
Rising geopolitical fragmentation risks also cast a cloud on the disinflationary recovery projected in this Regional
Economic Outlook: Europe. Trade fragmentation—as measured by the number of trade and foreign direct invest-
ment restrictions imposed on and by European countries—is on the rise (Figure 9), and Russia’s war in Ukraine
has increased economic and national security concerns within and outside Europe. These events have increased
uncertainty and volatility in the short term while raising risks of a durable drag on growth over the medium term.
Specifically, conflicts and weakened international cooperation could lead to a reconfiguration of trade and foreign
direct investment, renewed waves of supply disruptions, technological and payment systems fragmentation,

3
If firms’ energy efficiency improves less in response to higher energy prices—as would be the case if the pass-through from higher
energy prices to end users were to be durably muted—than has been the case historically, such as in the aftermath of oil price shocks,
medium-term output losses from the energy crisis would become larger.

April 2023  •  INTERNATIONAL MONETARY FUND

10 REGIONAL ECONOMIC OUTLOOK—Europe

rising input costs, financial instability, a fracturing

Figure 9. EU Trade Restrictions
of international monetary and financial systems, (Average number of new restrictions imposed and faced)
and productivity and output losses.
800 Restrictions on trade and FDI by EU on service
Restrictions on trade and FDI by EU on goods
700 Restrictions on trade and FDI on services
Policies: Acting Decisively Now 600
Restrictions on trade and FDI on goods

to Avoid a Hard Landing Later 500

Policymakers are facing the tough task of taming 400

persistent inflation while avoiding a recession—
300
including by preserving financial stability. To
succeed, macroeconomic, financial, and struc- 200

tural policies need to work in concert: (1) A tighter 100

monetary stance is needed to bring inflation down
0
decisively to central bank targets. Failure to do so 2017–19 2020–22
would require even more contractionary macro-
Sources: Global Trade Alert; and IMF staff calculations.
economic policies later, making a harsh landing far Note: EU = European Union; FDI = foreign direct investment.
more likely; (2) while monetary policy takes center
stage in the fight against inflation, a more restric-
tive fiscal policy would help ease demand pressures and achieve disinflation at lower interest rates, which will
help reduce risks to financial stability; (3) financial policies should focus on enhancing resilience to risks of higher
interest rates, including liquidity strains, asset price corrections, and broader downturn risks; finally, (4) struc-
tural policies should ease growth-inflation trade-offs through labor market and other reforms that raise labor
supply, and by implementing measures that strengthen energy security and demand efficiency, including by
promoting the green energy transition.

Monetary Policy: Keeping a Tight(er) Stance for Longer

High and potentially more persistent than expected underlying inflation calls for tight monetary policy until core
inflation is unambiguously on a path back to central bank inflation targets (Figure 10, panel 3). This approach
helps mitigate second-round effects and keeps inflation expectations well anchored in the face of building wage
pressures. Policy rates have increased significantly across the region but may still be too low to bring inflation
down to targets in a timely fashion in many cases. Some central banks (mostly among emerging European
economies) that started early have been early to slow or pause their policy tightening. In the euro area, although
the cumulative increase in policy rates has been larger than in past tightening cycles, real rates based on current
or one-year-ahead expected inflation remain low (Figure 10, panel 2). Where real rates are already high, but core
inflation rates are not yet on a clear declining path, prematurely easing the monetary stance should be avoided.
While evaluating the required degree of monetary tightening is a difficult task in times of heightened macro-
economic volatility, there are some indications that policy rates in a number of countries are at the lower end of
commonly used benchmarks such as Taylor rules, suggesting that higher rates may be needed to rein in inflation
in a timely manner (Figure 10, panel 1; Box 5).

A tighter monetary stance is also desirable from a risk management perspective: if inflation persistence is
uncertain, there are larger economic losses to be incurred from reacting too late versus reacting decisively early
on, because underestimating persistence would entrench high inflation and force central banks to tighten later
for longer, requiring a sharp recession to bring inflation back to target (Figure 11). Similarly, when the extent of
(unobservable) economic slack is uncertain, monetary policy would be well advised to place more weight on
observed inflation and labor market dynamics, both of which are observable and favor higher policy rates.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 11

Figure 10. Monetary Policy: Keeping a Tight Stance Figure 11. The Benefits of Monetary Policy Acting
for Longer Sooner Rather than Later in Euro Area
(Responses to a cost shock)
1. Current Policy Rates and Taylor Rule Uncertainty
(Percent) 1. Real Interest Rate
20 Policy rate 20 (Percent)
18 Strict IT 18 2.5 Low actual and high assumed
16 16 High actual and low assumed
2 Low actual and low assumed
14 14
12 12 1.5
10 10
8 8 1
6 6
0.5
4 4
2 2 0
0 0
–0.5
MDA

POL

ROU

SRB

ISL

ALB

CZE

UK

SWE

EA

NOR

CHE
1 4 7 10 13 16 19
Quarters
2. Real Policy Change Rate
(Percentage points) 2. Inflation Rate
4 (Percent)
AE EE US
2 5
Low actual and high assumed
0 High actual and low assumed
4
–2 Low actual and low assumed
–4 3
–6
–8 2
–10
1
–12
–14 0
–16
2010–19 2020–21 2022 2023 –1
1 4 7 10 13 16 19
3. Core Inflation Projection
Quarters
(Average; percent change, year-over-year)
18
2023 2024 Inflation target 3. Output Gap
16 (Percent)
14 0.2
12 0
10 –0.2
8 –0.4
6 –0.6
4 –0.8
2 –1.0 Low actual and high assumed
High actual and low assumed
0 –1.2
Low actual and low assumed
LTU
EST
LVA
SVK
AUT
CZE
SVN
NLD
DEU
BEL
ESP
MLT
PRT
EA
ITA
GRC
CYP
FRA
FIN
IRL
LUX

HUN
ROU
POL
RUS

–1.4

Advanced European economies Emerging –1.6

1 4 7 10 13 16 19
European
economies Quarters
Sources: European Central Bank; IMF, World Economic Outlook Source: IMF staff calculations.
database; and IMF staff calculations. Note: Optimal and robust monetary policy responses to a cost-push
Note: In panel 1, a hybrid Taylor rule is used; simulated values are shock are derived using a simple New Keynesian model embedded
computed using the October 2022 World Economic Outlook with different levels of inflation persistence and imperfect knowledge
projections for headline inflation and output growth starting in 2022 from the central bank; based on forthcoming work by Luis
(see Box 5 of this Regional Economic Outlook for more details). Country Brandao-Marques, Roland Meeks, and Vina Nguyen.
abbreviations are International Organization for Standardization
country codes. AE = advanced European economies; EE = emerging
European economies; EA = euro area; IT = inflation target; US = United
States.

April 2023  •  INTERNATIONAL MONETARY FUND

12 REGIONAL ECONOMIC OUTLOOK—Europe

Differing Paths Depending on Country Circumstances

Monetary policy paths will need to differ across countries depending on the extent of slack, inflation drivers and
their persistence, and inflation risks. For the euro area, the current baseline assumes a terminal rate of about
3¾ percent, implying additional policy hikes ahead. The ongoing quantitative tightening (QT) will support this
tighter stance while aiming to reduce the distortions stemming from the ECB’s large financial market footprint.
This can be achieved if QT is done in a predictable and gradual way. However, financial fragmentation—including
a sharp divergence in sovereign borrowing costs—and broader financial stability risks call for caution and flexi-
bility to change course if needed.

For the United Kingdom, monetary policy may need some further tightening to keep inflation expectations
well-anchored and bring inflation back to target, though risks to inflation are now more balanced. Central banks
in other advanced European economies (Sweden, Switzerland) would also need to calibrate carefully terminal
rates, and how long the stance remains tight, to bring down inflation in line with the target.

Central banks in emerging European economies will have to maintain a monetary stance that will decisively
contain further upward shifts in inflation expectations and avoid escalating wage-price dynamics, especially
where real policy rates are low, labor markets remain tight, and nominal wage growth and associated risks of
persistent inflation are already high (including Hungary, Poland). Depending on the circumstances, this may
require more rate increases. Elsewhere, policymakers should avoid pausing rate hikes or reversing previous
earlier tightening prematurely, even more so if this leads to exchange rate depreciations.

Monetary policy will have to adjust to changing data and conditions. For example, a less contractionary stance
would be warranted if financial conditions such as bank lending standards tighten notably for nonmonetary
policy-related reasons, including banking sector problems. While financial sector liquidity risks should be
addressed primarily through central banks’ well-established lender-of-last-resort role, a systemic financial crisis
would require monetary policy to switch gears and ease as recession prospects would rise and expected inflation
would fall. Other shocks would also warrant altering the course of monetary policy. For instance, renewed supply
pressures, such as from energy price hikes, would call for additional tightening, especially where second-round
effects and inflation persistence are high. Conversely, significantly faster cooling of underlying inflation because
of a sharp slowdown in demand, greater pass-through from lower commodity prices, and subdued nominal
wage growth would warrant less tightening. Communicating baseline paths and policy response functions to
markets while preparing them for potential deviations in response to shocks would help set expectations and
adequate rate pricing while allowing for flexibility in a credible and transparent manner.

Financial Policies: Reaffirming Financial Stability

Regulation and Supervision
Maintaining financial stability across markets, banks, and NBFIs will require close monitoring, strong supervision,
contingency planning, and prompt corrective action, where needed. Regulators and supervisors should keep
close watch on vulnerabilities in banks and NBFIs, including by stress-testing their balance sheets. In addition
to household firms’ balance sheet risks and their effects on banks, real estate risks, including in commercial real
estate markets, warrant continued close monitoring. The recent episodes of banking sector stress also point to
the importance of having contingency plans in place. In the European Union, extending bank resolution tools to
small- and medium-sized banks and clarifying the availability of the Single Resolution Fund’s resources would
strengthen the supervisors’ capacity to act. Ratifying the European Stability Mechanism’s amended treaty would
bolster the stability of the financial system by providing a backstop to the Single Resolution Fund. An agreement
on a pan-European deposit insurance could further enhance the credibility of bank resolution arrangements.
Finally, dealing with weak banks promptly should facilitate orderly exits of nonviable banks and ensure robust
capital restoration plans for the viable ones.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 13

Macroprudential Policies Figure 12. Costs and Benefits of Alternative Policies

Sound macroprudential policies remain to Support Households in an Adverse Scenario
important to guard against financial stability (Percent of households shielded from financial distress
versus cost of the policy in percent of GDP)
risks, including those from housing market
risks and rising household balance sheet 6
HUN
vulnerabilities (Box 3). Maintaining the current
5
macroprudential policy stance appears broadly
appropriate, but with variation across countries. POL
4 DEU
In countries where macro-financial imbalances ITA
are rising, an increase in buffers may be needed to FRA

Cost
3
preserve resilience, provided procyclical effects
are avoided. Raising countercyclical buffers 2
may be preferable to tightening borrower-
based measures because the former increase 1

banks’ reserves to absorb losses and do not

0
reduce credit as much, particularly if banks have 10 15 20 25 30 35
enough capital headroom. By contrast, a tight- Benefit
ening of borrower-based measures will have
Sources: Eurostat; Household Finance and Consumption Survey
no impact on the materialization of immediate microdata; and IMF staff calculations.
losses (because they apply only to new flows, Note: The benefit of the policy is measured by the share of households
shielded from financial distress. A household is in financial distress
which are typically lower in a downturn) and when the cost-of-living-adjusted debt-service-to-income ratio is equal
may unduly constrain credit growth. A sharp to or higher than 70 percent. The cost of the policy is measured by the
estimated fiscal expenditure as a share of GDP. The figure shows three
downturn causing widespread credit supply policy interventions: (1) a broad targeting policy, (2) a medium
disruptions, or an abrupt house price correc- targeting policy, and (3) a narrow targeting policy. For details, please
see Valderrama and others 2023. Country abbreviations are
tion, would warrant the immediate relaxation International Organization for Standardization country codes.
of capital-based tools. To avoid adverse
macro-financial feedback loops, some cyclical
borrower-based measures could also be eased
if they have become too constraining, and there
is enough macroprudential policy space.

Financial Policy Measures to Support Households

Governments’ financial policy measures to help households cope with rising interest rates need to be well-
designed and narrowly targeted. They should avoid forced conversions from flexible- to fixed-rate mortgages
at below market rates and regulatory forbearance, which have gained ground in some emerging European
economies over the past year. Such measures not only weaken transmission of policy rate increases to the
economy but also delay loss recognition in banks’ books, distort market signals, shift burdens ex post in a
manner that increases moral hazard, and could undermine banking sector deepening. Targeted transfers to
lower-income households are less distortive and more cost-effective ways to reduce risks of debt distress. This is
particularly true in advanced European economies (such as Germany), where the cost-effectiveness of transfers
to prevent household debt distress—as measured by the share of households saved from financial distress per
percentage point of GDP spent—declines rapidly as support is broadened to include higher-income households
(Figure 12).

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14 REGIONAL ECONOMIC OUTLOOK—Europe

Fiscal Policies: Taking Advantage of Recent Fiscal

Windfalls to Consolidate at a Faster Pace
Some mild fiscal consolidation is projected over the 2023–24 period (Figure 13, panel 1), but a stronger and
sustained effort is needed now in most countries. In advanced European economies, a meaningful fiscal consol-
idation is expected only next year. Emerging European economies are set to improve their fiscal balance more
meaningfully in 2023, even if the adjustment comes after a significant loosening last year.

But across the region, the projected consolidation is less than projected in the October 2022 Regional Economic
Outlook: Europe, partly reflecting the far-reaching support packages to counter the cost-of-living crisis adopted
last fall. More is needed to support monetary policy in the fight against inflation, helping central banks achieve
their objectives at lower interest rates, with positive spillovers for public debt service costs and financial stability.
Taking a longer view, governments also need to pursue more ambitious fiscal consolidation to restore their
ability to cope with large shocks of the magnitude Europe experienced during the pandemic and energy crisis.

Improving Policy Targeting to Rebuild Fiscal Space

Recent fiscal windfalls strengthen the case for larger and faster fiscal consolidation. The sharp decline in energy
prices should make it easier to consolidate public finances. For example, in Denmark and Finland, fiscal savings
from lower energy prices compared with the October 2022 World Economic Outlook may be about 0.1 percent
of GDP, whereas in Montenegro and Slovenia, they could reach about 0.5 percent of GDP. Another recent fiscal
windfall has been the positive impact of high inflation on tax revenue. Governments’ fiscal policy choices need to
factor in that such revenue buoyancy is not projected to last, and interest burdens will rise over time as govern-
ments roll over maturing debt and fund new deficits at higher interest rates (Figure 13, panels 2 and 3).

Better targeting energy relief measures could contribute to fiscal adjustment while continuing helping those
who need such support the most. The abrupt surge in energy prices in 2022 prompted European policymakers
to assist households and firms through transfers and subsidies and by delaying the pass-through to domestic
prices. In many countries (such as the Baltics and Hungary), support was largely untargeted (Figure 13, panel
4). In some cases (for example, France and Spain), limited pass-through of higher energy prices partly muted
the reduction in energy demand. Amid lower energy prices, fiscal policy should unwind support that is no
longer needed, target any remaining measures better, and allow domestic prices to reflect price signals. Direct
transfers should reach only the most vulnerable, and support should be coordinated across countries to avoid
unwarranted asymmetries that could hinder international competitiveness.

Public budgets also need to make room for longer-term spending pressures from pensions, health, energy
security, and the green transition. Announcing clear, credible, and, for some countries, more ambitious medi-
um-term adjustment paths would ease risks and financing pressures. Many countries face immediate and likely
lasting budgetary pressures from higher military spending. In Türkiye, reconstruction needs following the earth-
quakes will require sizable investment to rebuild buildings and infrastructure. Across much of Europe, significant
opportunities remain for growth-enhancing tax and expenditure reforms, such as broadening tax bases or
shifting taxation away from labor toward less distortive taxes on property and wealth. Budget pressures from
Ukrainian refugee inflows will remain a challenge for the main recipient countries (the Czech Republic, Estonia,
and Poland, among others) for as long as the war continues. Public expenditures to cover immediate needs such
as social services or health are expected to decline gradually, but other costs related to social and physical
infrastructure (schools, hospitals, and housing) are likely to be more persistent. Increased tax revenues from
continued integration of refugees into host countries’ labor markets will provide some offset.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 15

Figure 13. Fiscal Developments

1. Primary Balance Projections 2. General Government Taxes on Goods and Services

(Percent of potential GDP, 2021–26) (Year-over-year percent change)
Change in Apr. 2023 WEO Oct. 2022 WEO
1.0 Cyclically adjusted primary balance 20
AE EE
0.5 18
0.0 16
–0.5 14
–1.0 12
–1.5 10
–2.0 8
–2.5 6
–3.0 4
–3.5 2
–4.0 0
2018–21 2022–23
2021

2021
22

23

24

25

26

22

23

24

25

26
Advanced European economies Emerging European economies

3. Interest Payments Projections 4. Targeting of Household Support Measures

(Percent of GDP) (Percent of GDP)
3.0 Not-targeted and/or distortionary measures 3.5
Apr. 2023 WEO interest expenses
Apr. 2021 WEO interest expenses Targeted/non-distortionary
2.5 3.0

2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5 0.5

0.0 0
2022 2023 2026 2022 2023 2026 Advanced European economies Emerging European economies
Advanced European economies Emerging European economies

Sources: IMF, World Economic Outlook database; and IMF staff calculations.
Note: In panel 4, it is the cumulative fiscal cost over 2021–23. Country abbreviations are International Organization for Standardization country
codes. AE = advanced European economies; EE = emerging European economies; WEO = World Economic Outlook.

Windfall taxes imposed ex post and singling out particular sectors—as already enacted or currently planned in
some countries in the energy and banking sectors—should be avoided. Where they have been introduced, they
should remain strictly temporary and their effects should be carefully monitored to minimize any adverse effects
on investment and financial stability risks.

Tailoring Fiscal Policy Stance to Country Circumstances

Countries with elevated debt-to-GDP ratios, such as a few euro area economies, are in greatest need of further
consolidation in 2023. Debt ratios are projected to decline somewhat in the medium term in low-debt advanced
European economies but are projected to remain broadly stable in their high-debt counterparts. In general,
public debt interest burdens as a share of GDP will rise more in emerging European economies, where the rise
in sovereign spreads has been larger and the tenor of debt is shorter. Countries with limited fiscal space should
cut deficits decisively in 2023, particularly where labor markets remain resilient and economic slack limited.
Countries where fiscal space is more ample can afford a slower consolidation pace (for example, Latvia). In the
European Union, the European Council’s recent endorsement of the broad principles of the EU fiscal gover-
nance reform is an important step to provide a strong fiscal framework that relies on a risk-based approach and

April 2023  •  INTERNATIONAL MONETARY FUND

16 REGIONAL ECONOMIC OUTLOOK—Europe

medium-term fiscal plans while keeping the 3 and 60 percent of GDP reference values for fiscal deficits and
public debt, respectively. A swift agreement on a new framework—including clarification of its implementation—
would help support a sustained consolidation, tailored to country-specific circumstances.

Fiscal policy should support monetary policy in bringing inflation back to target in most scenarios. The consol-
idation path would need to be adjusted if major adverse shocks significantly reduced activity and inflation. In
such a scenario, countries with available fiscal space could allow automatic stabilizers to work and slow the pace
of consolidation to smooth the weakening of aggregate demand and support the most vulnerable as needed.
Economies with limited fiscal space would need to offset any additional support by reducing other spending—
except for harmful reductions in health and education spending and in public investment—or by increasing less
distortive and progressive taxes, such as those on property. By contrast, smaller temporary demand shocks,
or long-lasting adverse supply shocks, would not warrant delaying fiscal consolidation plans, especially in
economies where greater-than-projected consolidation would be desirable under the baseline projection.

Structural Policies: Easing Growth-Inflation Trade-offs

by Enhancing Labor Supply and Energy Security
At the current juncture, structural reforms should prioritize areas where they can ease growth-inflation trade-offs
most quickly and effectively. Beyond pursuing long-standing reform needs critical to raising Europe’s produc-
tivity growth and reduce scarring from successive crises, two priorities stand out: increasing labor supply by
enhancing labor force participation and worker job transitions, and improving energy security and consumption
efficiency, including by speeding up the green transition.

Raising labor supply and improving the matching between workers and vacancies could help ease labor market
tensions amid demographic pressures. In many countries, relevant reforms in this regard include enhancing
childcare policies and cutting second-earner taxation to raise female labor force participation, reducing disin-
centives to continued work for older workers through pension reforms, scaling up and better designing active
labor market policies, and easing employment protection legislation for regular workers relative to temporary
workers. Although priorities vary across countries, many of these reforms would be particularly beneficial in
several euro area economies and in emerging European economies. In economies hosting large refugee popu-
lations, several of these reforms would also speed up labor market integration—for example, by providing
language training as part of targeted active labor market policies.

Speeding up the green transition would support Europe’s energy security and prosperity in the medium term.
The European Commission estimates that achieving Europe’s emissions-reduction goals will require additional
investment of some €3–4 trillion through 2030. Here the European Union’s REPowerEU plan helpfully proposes
enhancing long-term energy efficiency measures, diversifying energy supplies, and supporting the develop-
ment of green technologies. To achieve these objectives, the European Union has made €225 billion in loans
available under the Recovery and Resilience Facility, with additional grants and voluntary transfers from different
sources. Continued progress on implementing Recovery and Resilience Plans will also help. However, about
one-third of countries are lagging behind their plans, about half of which are experiencing significant delays in
general (Hungary, Poland) or on selected significant reforms (Belgium, Bulgaria, Romania). Completion of the
Capital Markets Union could stimulate investment and growth in Europe, including in support of the European
Union’s climate goals.

If well-designed, the European Union’s proposed Green Deal Industrial Plan could complement the bloc’s many
ongoing initiatives to achieve climate neutrality while preserving the European Union’s competitiveness as a
green investment location. A constructive European response to industrial policies and subsidies from outside
Europe should seek to protect competitiveness while minimizing trade distortions and pursuing broader aims
such as speedy decarbonization and development policy goals. As the European Union fleshes out the details

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 17

Figure 14. Energy Security and Green Transition

1. Net Fossil Fuel Imports and Renewables in the 2. Energy Import Dependence under Current and
European Union, 2000–21 Zero Carbon Power Generation Mix
(Percent of gross available energy) (Percent of gross available energy)
40 80
Current Zero carbon
35 70

30 Renewables 60
Natural gas
25 Coal and other solid fossil fuels 50
Oil and petroleum products
20 40

15 30

10 20

5 10

0 0
2000–04 2005–09 2010–14 2015–19 2020 2021 ITA ESP DEU EU-27 HUN FRA

Sources: International Energy Agency; and IMF staff calculations.

Note: Country abbreviations are International Organization for Standardization country codes. EU = European Union.

of the proposal, it will be important for it to keep working cooperatively with other countries committed to the
green transition and ensure that any subsidies to green industries are limited in scope and well-targeted and
minimize distortions to international trade and the single market.

Enhancing energy security will require significant additional efforts both to expand renewables but also to
strengthen energy efficiency. Renewable deployment needs to double from over its 2000–21 average speed to
achieve the European Union’s target for the share of renewables in final energy consumption of 42.5 percent.
The timely implementation of policies incentivizing and enabling such investment are critical, including subsidies
and simplified procedures for utility-scale renewable generation. On its own, however, a rising share of renew-
ables does not necessarily translate into major improvements in energy security. In the past two decades, the
share of net gas imports (in total gross available energy) rose along with the European Union’s share of renew-
ables, as gas substituted for coal and was also used for other purposes, including heating (Figure 14, panel 1).
In addition, while fully decarbonizing the power sector would reduce dependence on imported fossil fuels,
this decline would be modest (Figure 14, panel 2). Other complementary policies that cover all sources of fossil
fuel energy consumption will be needed to reduce dependence more decisively. These can include targeted
measures, such as curbing the extensive use of gas for heating by incentivizing the use of heat pumps. They
should also include broad-based measures, such as expanding the coverage and raising the price of carbon in
Europe, including by continuing to expand and tighten the European Union’s emission trading program.

References
Bibbee, Alexandra, Rauf Gönenç, Scott Jacobs, Josef Konvitz, and Robert Price. 2000. “Economic Effects
of the 1999 Turkish Earthquakes: An Interim Report.” OECD Working Paper 247. Organisation for Economic
Co-operation and Development, Paris.

Brandao-Marques, Luis, Roland Meeks, and Vina Nguyen. Forthcoming. “A Roadmap for Monetary Policy in
Europe” IMF Working Paper, International Monetary Fund, Washington, DC.

Engler, Philipp, Gianluigi Ferrucci, and Tianxiao Zheng. Forthcoming. “ECB Spillovers to Emerging Europe: The
Past and Current Experience.” IMF Working Paper, International Monetary Fund, Washington, DC.

April 2023  •  INTERNATIONAL MONETARY FUND

18 REGIONAL ECONOMIC OUTLOOK—Europe

Kolasa, Marcin, and Grzegorz Wesołowski. 2020. “International Spillovers of Quantitative Easing.” Journal of
International Economics 126 (September): 1–32.

Lan, Ting, Manasa Patnam, Fred Toscani, and Claire Yi Li. Forthcoming. “Energy Prices, Energy Efficiency and
Potential Growth.” IMF Working Paper, International Monetary Fund, Washington, DC.

Li, Grace, and Gabriel Di Bella. Forthcoming. “Bridging the Gap: Real-time Policy Challenges and Output Gap
Uncertainty.” IMF Working Paper, International Monetary Fund, Washington, DC.

Valderrama, Laura, Patrick Gorse, Marina Marinkov, and Petia Topalova. 2023. “European Housing Markets at a
Turning Point – Risks, Household and Bank Vulnerabilities, and Policy Options.” IMF Working Paper 2023/076,
International Monetary Fund, Washington, DC.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 19

Box 1. Recent Economic Developments in Russia and Ukraine

Ukraine
Russia’s invasion of Ukraine led to a contraction of Ukraine’s GDP of approximately 30 percent in 2022.
Russia’s invasion has resulted in a significant destruction of infrastructure, damage to capacity in the
agricultural and metals sectors, and labor supply disruption due to loss of life and migration. About
35 percent of the population fled their homes, and the World Bank has assessed that the poverty rate
increased fivefold to about 20 percent since the war started. Support from the international community
has been crucial in helping to preserve macroeconomic stability, while sustaining essential health and
education services, payments for pensions, public sector wages, and social programs for the vulnerable.

The baseline projection is for GDP to remain about flat in 2023. The economy has so far adapted to
power outages, and high-frequency indicators point to an incipient pickup in activity that should continue
throughout the year, assuming no significant escalation in combat. An increase in government expen-
ditures is expected to support demand, but still weak private investment and net exports will remain
a drag on growth—with the current account deficit projected to reach $6.5 billion, and goods exports
declining another 20 percent after their one-third drop in 2022. The continued export decline reflects (1)
lost or impaired productive capacity in the metals and minerals industries, given continuing challenges
on power and logistics; and (2) headwinds for Ukraine’s key agricultural sector due to a 40 percent drop
in harvest volumes in 2022, leaving less inventory to ship in 2023. Ukraine’s import demand is expected
to grow modestly, reflecting weak consumption versus a need to rebuild inventories, especially of natural
gas for the next heating season, as well as imports for essential repairs.

Costs for rebuilding Ukraine’s economy are substantial. War developments could disrupt economic
activity, deteriorate the fiscal and external outlooks, and intensify financial and inflationary pressures.
Bilateral and multilateral support will continue to be required for urgent repairs to energy infrastructure,
roads, bridges, housing, schools, and hospitals to ensure that basic services can be delivered. Moreover,
sufficiently large and concessional support will need to be sustained in the medium term to rebuild social
and economic infrastructure and strengthen incentives for migrants to return home. In addition, struc-
tural reforms—including those in pursuit of EU accession—to upgrade regulatory frameworks, support the
rule of law, and encourage market competition could boost productivity, trade, and Ukraine’s recovery.

Russia
Russia’s economy has so far proven to be more resilient to sanctions than many observers initially
expected. After a sharp drop in the second quarter of last year, the economy bounced back strongly in the
third and fourth quarters, limiting the 2022 drop in output to 2.1 percent. The momentum from the second
half of last year is carried over to this year, with growth projected at 0.7 percent. A large improvement
in the terms of trade and resilient oil export volumes in the course drove oil and gas revenues to record
highs and supported the economy in 2022. Russia’s ability to redirect crude exports from sanctioning to
nonsanctioning countries is confirmed by independent, nonofficial data, while gas export revenues were
also high despite the sharp drop in volumes. The sharp rise in government, including defense-related,
spending in the second half of the year provided a further boost to GDP of about 4 percent of potential
GDP. With sanctions severely curtailing imports from Western economies, the current account surplus
rose to a record $227 billion.

Prepared by the IMF Ukraine and Russia teams.

April 2023  •  INTERNATIONAL MONETARY FUND

20 REGIONAL ECONOMIC OUTLOOK—Europe

Box 1. (continued)
The outlook, however, shows pressures building up. Staff
Box Figure 1.1. Russia: Crude
forecasts show a sharp decline in fiscal revenues in 2023,
Exports, All Destinations
mainly as a result of lower oil and gas prices. On December (Daily average per week, KBD)
5, 2022, the European Union’s crude oil import ban and a
5,000
price cap of $60 per barrel on exports to third countries EU-27
Other
came into effect, followed on February 5, 2023, by an addi- 2021 total avg.
4,000 2022 total avg.
tional import ban and price cap on oil products. While
it is too early to assess the impact of the sanctions on oil
products, the price cap on crude has not led to a decline 3,000

in Russian oil volumes so far, but it has increased the price

discount. Combined with the sharp decline in gas prices 2,000
projected for this year, oil and gas revenues are therefore
set to fall far below last year’s levels. This means that 1,000
the authorities will have to either curtail fiscal spending
sharply or find ways to finance significantly higher deficits. 0
Jan. May Aug. Nov. Feb.
Staff have revised down substantially the estimate of 2022 22 22 22 23

potential growth in the Russian economy, to less than Sources: Kpler; and IMF staff calculations.
1 percent per year. This reflects, among other factors, Note: EU = European Union; KBD = thousand
barrels per day.
the isolation triggered by trade and financial sanctions,
curtailed access to advanced technology and know-how,
and a substantial loss in human capital. As a result, Russia’s output in 2027 is projected to be about
8 percent lower than forecasted prior to Russia’s invasion of Ukraine. Such low potential growth would also
mean that Russia’s per capita income levels would no longer converge toward those of richer countries
and could even fall further behind.

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 Europe’s Balancing Act: Taming Inflation without a Recession 21

Box 2. Türkiye: The Macroeconomic Impact of the Recent Earthquakes

The human and physical toll of the earthquakes has been
Box Figure 2.1. Türkiye:
high. Tens of thousands of lives have been tragically lost, and
Contributions to Estimated Growth
Impact from Earthquakes many livelihoods and homes compromised, after powerful
(Percentage points) earthquakes struck Türkiye and Syria in February. The
3.0 Turkish authorities estimated the total financial burden from
this disaster at $104 billion (11 percent of 2022 GDP).1
2.0
The public sector will likely bear most of the cost of crucial
1.0
recovery and reconstruction efforts. While support from
0.0 the international community and private investment will
Activity disruption help address some of the reconstruction and relief needs,
–1.0
Activity offset from the burden on the public sector will likely be large. The final
other regions
–2.0
Reconstruction
increase in the general government deficit, however, might
investment not reflect the full cost of reconstruction because of possible
–3.0 Import offset
Total quasi-fiscal operations through the state-owned housing
–4.0 agency and the recently announced off-budget reconstruc-
2023 2024
tion fund, and because offsetting measures are possible, as
Source: IMF staff calculations.
seen following previous earthquakes.2 Taken together, staff’s
baseline assumes that the earthquakes will add a combined
2.5 percent of GDP to the fiscal deficit in 2023–24. While
public debt remains low and reconstruction financing needs appear manageable, a sharp rise in domestic
borrowing could increase banks’ sovereign exposure and weigh on their performance.

Reconstruction will moderate the adverse effect on growth. While highly uncertain, the overall growth
impact from the earthquakes will crucially depend on the pace of reconstruction, which will determine
both the investment boost to growth and the speed with which economic activity normalizes. Staff’s
baseline includes a 0.8 percentage point drag on growth in 2023 and a 0.6 percentage point boost in
2024. These estimates assume that reconstruction spending will be frontloaded. They also reflect the
affected region’s relatively small share in GDP; the initial activity shortfall in affected provinces; and a
partial growth offset from non-affected regions, driven by some reallocation of displaced workers and
increased use of industrial spare capacity. Staff’s baseline also includes stronger-than-expected activity
pre-earthquakes.

Spillovers from the earthquakes are also expected to widen the current account deficit and to pose
upside risks to already-high inflation. Higher imports to meet reconstruction needs and a temporary
reduction in exports from affected provinces are expected to slow, by about 1.3 percentage point of
GDP, the projected improvement in the current account deficit this year. This will only be partly offset by
transfers from abroad as a result of announced international support.

Prepared by Silvia Domit.

1
The total financial burden amounts to 9 percent of GDP when using as reference the authorities’ 2023 GDP forecast. The estimate
includes emergency spending, debris management, insurance costs, GDP losses from activity disruption, and reconstruction
to modern standards.
2
See Bibbee and others (2000).

April 2023  •  INTERNATIONAL MONETARY FUND

22 REGIONAL ECONOMIC OUTLOOK—Europe

Box 3. Risks to Housing Markets and Household and Bank Balance Sheets in Europe
Real estate markets show growing
Box Figure 3.1. Europe: Evolution of Real House
signs of overvaluation across Europe.
Prices
Real house prices have doubled since (Selected countries, 2018:Q4 = 100)
2015 in the Czech Republic, Hungary, 140 BEL AUT ESP
DEU ITA FRA
Iceland, Luxembourg, The Netherlands,
130 GRC NLD SVK
and Portugal. Since the pandemic, the SWE EA EA17
ROU PRT
divergence between house prices and 120
income, and between house prices and
rents, has widened further. Price-to- 110

income ratios currently stand at more than 100

30 percent above their long-term trends,
while price-to-rent ratios also far exceed 90

22:Q3
2018:Q1
18:Q2
18:Q3
18:Q4
19:Q1
19:Q2

19:Q4
20:Q1
20:Q2
20:Q3
20:Q4
21:Q1
21:Q2
21:Q3
21:Q4
22:Q1
22:Q2
19:Q3
their historical norms, including in parts of
northern Europe and emerging European
economies. Similarly, empirical models
Box Figure 3.2. Europe: Mortgage Debt at Risk
linking house prices to their fundamental (Percent)
drivers point to an overvaluation of 15–20 80 Range
percent in most European countries. 70 Original
Original average
Therefore, with mortgage rates still on the 60 Cost of living average
rise and real incomes dented by inflation, 50
house prices have been declining recently 40
in many markets (Box Figure 3.1). 30
20
Rising living costs and mortgage rates
10
are stretching household balance
0
sheets, which could deteriorate further
HRV
CYP
LTU
SVN
SVK
POL
HUN
GRC
ITA
PRT
FRA
LVA
MLT
NLD
DEU
LUX
IRL
FIN
BEL
AUT
EST
if additional shocks hit. The share of
households that could struggle to afford Box Figure 3.3. Europe: Bank Capital Depletion from
basic expenses (food, utilities, rents, debt Household Balance Sheet Stress Scenarios
repayments) is likely to increase by 10 (Basis points)
percentage points in 2023, accounting 280 100
260 Range
for about 25 percent of mortgage debt. 240 Baseline 90
220 80
Under adverse scenarios featuring higher 200 70
living costs and mortgage rates, about 45 180
60
160
percent of households—and more than 80 140 50
120 40
percent of lower-income ones—could be 100
80 30
stretched financially, holding more than 40 60 20
percent of mortgage debt and 45 percent 40
10
20
of consumer debt (Box Figure 3.2). 0 0
SVK
GRC
CYP
LVA
HRV
PRT
HUN
EST
ITA

MLT
FIN
SVN
IRL
POL
FRA
LTU
NLD
AUT
BEL
LUX

Impacts on bank balance sheets should

be generally contained, but the picture Sources: Eurostat; Household Finance and Consumption Survey
microdata; and IMF staff calculations.
would be bleaker under a combination of Note: Country abbreviations are International Organization for
Standardization country codes. EA17 excludes Croatia, Cyprus, and
Malta from the euro area.

Prepared by Laura Valderrama.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 23

Box 3. (continued)
shocks, including a major house price correction. Under the baseline (Common Equity Tier 1), capital
depletion from rising household debt default would not exceed 100 basis points in most countries, but a
20 percent downturn in the housing market would push up losses into the 100–300 basis point range, with
southern and eastern European countries affected most severely (Box Figure 3.3). Such losses could lead
to tighter credit standards, increasing the chances of adverse macro-financial feedback loops among
bank balance sheets, housing (and other asset) prices, and the real economy.

April 2023  •  INTERNATIONAL MONETARY FUND

24 REGIONAL ECONOMIC OUTLOOK—Europe

Box 4. Spillovers of European Central Bank Monetary Policy on Emerging European

Economies
Emerging European economies experienced exchange rate and bond yield pressures when expecta-
tions of future ECB monetary tightening shifted significantly in the summer of 2022. Capital outflows
were accompanied by currency depreciations and increases in borrowing costs. Bond yields rose amid
rising policy rates and risk premiums. Countries with funding constraints and sizable trade deficits
financed by foreign currency–denominated debt were more exposed (for example, Romania and Serbia)
(Box Figure 4.1, panel 1).

Recent spillover patterns are confirmed by an analysis of historical ECB tightening episodes. Based
on local projection methods for the period from the first quarter of 1999 through the third quarter of
2022, ECB monetary tightening surprises are found to have increased emerging European economies
government bond yields more than one to one, and also to have generated sizable increases in sovereign
spreads and depreciations in domestic currencies. These financial spillovers also had a substantial impact
on domestic output, which decreased following a contractionary monetary policy shock from the ECB,
reaching a trough after about 10 quarters (Box Figure 4.1, panel 2). More flexible exchange rate regimes
and strong fundamentals—reflected in greater domestic financial market development, stronger reserve
cushions, and lower public gross financing needs—tended to mitigate these spillovers.

Box Figure 4.1 Impact of ECB Monetary Tightening on Emerging

European Economies
1. Impact on 10-Year Government Bond 2. Impact on Domestic Output
Yield (Impact of one-standard-deviation ECB
(Difference in impact of 100 basis monetary tightening shock, percent)
point ECB monetary tightening shock
between countries with high and low values
of fundamentals, percentage points)
2 0.6

1.5 0.4
0.2
1
0
0.5 –0.2
0 –0.4
–0.6
–0.5
–0.8
–1 –1
–1.5 –1.2
Gross Reserves Financial Exchange 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
financing development rate Quarters
needs regime

Source: IMF staff calculations.

Note: Columns in panel 1 show the estimated differential impact of the 100 basis point ECB monetary
policy tightening in the summer of 2022 for high and low values of various fundamentals mentioned on
the x-axis, where the exchange rate regime bar refers to the relative difference between floating and
fixed exchange rate regimes. Panel 2 shows the impulse response of (the natural logarithm of) real GDP
to a one-standard-deviation ECB monetary tightening shock, based on quarterly data for 16 countries
during the first quarter of 1999 through the third quarter of 2022. The shaded area indicates significance
at the 90 percent level, based on standard errors two-way clustered at the country and quarter levels. For
details, see Engler, Ferrucci, and Zheng (forthcoming). ECB = European Central Bank.

Prepared by Gianluigi Ferrucci, Philipp Engler, and Tianxiao Zheng.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 25

Box 4. (continued)
A unique feature of the ongoing ECB’s tightening cycle is that it combines a sequence of sharp interest
rate hikes with plans to progressively reduce the size of bond holdings under the asset purchase
program. This raises the question of whether spillovers from conventional and unconventional measures
differ, and whether the exchange rate regime and foreign exchange interventions could shape spillovers
to emerging European economies.

The ECB’s interest rate policy and quantitative tightening both generate significant spillovers to
emerging European economies. Using a two-country dynamic stochastic general equilibrium model
calibrated to the current context,1 a first exercise compares spillovers from a scenario in which interest
rates are hiked and complemented by a gradual and predictable unwinding of the ECB’s asset purchase
program stock—both broadly in line with ECB communication as of March 2023—to a counterfactual where
only the interest rate hike is considered.2 Both tightening strategies lead to lower output in emerging
European economies, with tightening via interest rate policy accounting for a somewhat larger share of
the overall output losses (Box Figure 4.2).

The adverse spillover effects from tighter ECB monetary policy tend to be more elevated under a fixed
exchange rate regime than under the baseline of an inflation targeting regime with a freely floating
currency. The results also suggest that, for countries with fixed exchange rate regimes, foreign exchange
intervention can be an effective line of defense in terms of output and inflation stabilization when the
ECB pursues both conventional and unconventional tightening. Generally, these findings are a reminder
of the potential costs of a fixed exchange rate regime when the economy is exposed to large shocks with
potentially asymmetric effects.

Box Figure 4.2. Spillovers to Emerging European Economies of Alternative

ECB Tightening Policies
1. Output 2. Inflation
(Percentage point deviation from baseline) (Percentage point deviation from baseline)
0.1 0.4
0 0.3
0.2
–0.1
0.1
–0.2 0
–0.3 –0.1
–0.4 Tighter interest rate Tighter interest rate –0.2
policy policy –0.3
–0.5 Tighter interest rate Tighter interest rate –0.4
–0.6 policy and QT policy and QT –0.5
–0.7 –0.6
0 4 8 12 0 4 8 12
Quarters Quarters

Source: IMF staff calculations.

Note: Spillovers to a representative emerging European economy with flexible exchange rate and
inflation targeting central bank. Spillovers are expressed in terms of deviation from a gradual tightening
scenario in which both the European Central Bank and the emerging European central bank follow a
passive monetary policy in line with a standard Taylor rule. QT = quantitative tightening, namely a
reduction in asset purchase program holdings.

1
For details on the model, see Kolasa and Wesołowski (2020).
2
The interest rate hike is calibrated to resemble the tightening that occurred between July 2022 and March 2023. It assumes
that the policy rate is increased by 50 basis points above the prediction from a standard Taylor rule in four steps over one
year. The gradual and predictable unwinding of the asset purchase program is calibrated to mimic the ECB’s announcement
of December 2022, envisioning a quarterly pace of reduction of asset purchase program holdings of €45 billion.

April 2023  •  INTERNATIONAL MONETARY FUND

26 REGIONAL ECONOMIC OUTLOOK—Europe

Box 5. What Does the Taylor Rule Say about the Stance of Monetary Policy
across Europe?
The Taylor rule provides an approximate optimal monetary policy path that limits welfare losses from
(output and inflation) volatility. Estimated based on past data, it provides a useful description of many
central banks’ reaction function, and, calibrated correctly, it can inform the optimal monetary policy path.
Thus, it is a simple, positive, and normative metric, a general version of which is given by:

it = ρit – 1 + (1 – ρ) [r* + π* + βCPI (π t – π*) + βY (y t – y*)]

where it is the short-term rate, ρ is the interest rate smoothing parameter, r* is the natural real rate, and π*
is the inflation target. For what follows, π t is the average headline inflation in t and t + 1, and (y t – y*) is the
deviation of output growth from its average value.1

To account for large uncertainty around (country-specific) optimal parameters, Taylor rule–implied rates
are simulated for a wide range of parameters. The further actual policy rates are in the tail of the range,
the more likely that rate changes are needed, all else equal. The parameter space for the simulation is
given by ρ e (0.4,0.6), r* e (r C * – 1, r C * + 1) , βCPI e (1.0,1.5), and βY e (0,0.4) and is motivated by the empirical
and theoretical literature. These ranges, which could possibly be narrowed significantly from country
to country (reducing the uncertainty around the country-specific rates), nest a strict inflation target rule
βY = 0, where policy rates react only to inflation, and other parameters are fixed at respective midvalues
of the ranges. To allow for differences in the natural interest rate r* while preserving parsimony across
countries, three groups are differentiated based on historical ex post r* and estimates in the literature:
r C * = 2 for Moldova and Türkiye; r C * = 0 for the Czech Republic, euro area, Norway, Sweden, Switzerland,
and the United Kingdom; and r C * = 1 for all others. Simulations are based on observed data and IMF
staff projections for inflation and output growth. They start in 2022. Inflation targets are the respective
countries’ targets, or the midpoints of the range for countries with upper and lower bounds.

The parameter-implied uncertainty makes the approach less suited for accurate advice on the precise
optimal policy rate, but it is informative of whether policy rates are more likely to be on the low side
or on the high side. Current policy rates are generally found to be at the lower end of the Taylor rule–
implied range. This has not been the case historically, despite episodes of higher inflation and policy
rates. Thus, under the baseline projection, it is likely that, for several countries, policy rates will still need
to increase and remain higher for some time. Because a hybrid version of the Taylor rule (with a forward-
looking inflation term) is simulated, the case for higher policy rates would be even more pressing at the
current juncture if only the contemporaneous inflation rate were to be included in the Taylor rule. This is
potentially a better reflection of the accurate policy stance in cases where inflation expectations are less
well anchored.

Prepared by Sebastian Weber.

1
Variations of the Taylor rule exist focusing on output gaps or changes in the unemployment rate for (y t – y*) or alternative inflation
metrics.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 27

Box 6. The State of the European Banking Sector

Amid rising interest rates, European banks faced financial stress in early 2023. The failure of a US
regional bank and the need to rescue Credit Suisse triggered worries about broader vulnerabilities in
the financial system. With limited direct contagion through counterparty exposure, the main driver was
market sentiment. Stock prices, default insurances, and secondary market rates for selected bank debt
suffered setbacks.

Europe’s banking sector today is better prepared for such testing times. Following several rounds of
new financial sector regulation, bank liquidity and capital buffers have strengthened significantly (Box
Figures 6.1 and 6.2). Headroom above regulatory limits is comfortable. The average (asset-weighted)
Common Equity Tier 1 (CET1) ratio in European banks exceeds 16 percent. High-quality liquid assets
of banks are also well above the regulatory limit with liquidity coverage ratios averaging more than 150
percent across Europe. Reliance of euro area global systemically important banks on wholesale funding
and unsecured deposits from nonfinancial corporations (NFCs) range between 22 and 37 percent (Box
Figure 6.3).

Pockets of vulnerabilities exist, however, including from unrealized losses, asset quality, and feedback
loops with nonbank financial institutions (NBFIs). Fast-rising interest rates exposed banks with large
fixed-income assets. In case of need, for instance due to funding shocks generated by changing market
sentiment, these assets would have to be sold at a loss. Such unrealized losses, often associated with
sovereign assets held to maturity, are significant for a number of countries, but are on average within
headroom above CET1 thresholds even before accounting for possible unrealized gains from fixed-rate
liabilities, hedges, or other offsetting factors.

A deterioration of asset quality is another potential cause for concern. While nonperforming loan (NPL)
ratios are at a historic low, so-called stage 2 loans, for which banks are less certain of credit quality, and
corporate insolvency filings are increasing (Box Figure 6.4). Finally, NBFIs, especially where leveraged,
could amplify financial market stress with potential adverse feedback loops to banks. These risks would
further rise if persistently high underlying inflation led to sharply higher-than-expected interest rates.

While there has been important progress, the financial system could be strengthened further.
Supervisors can reduce uncertainty in markets by enhancing the transparency of banks’ unrealized losses
on hold-to-maturity exposures and offsetting factors, routinely performing stress tests, and verifying
the feasibility and stability of bank funding structures. A faithful implementation of Basel III standards
remains critical as the recent failure of Silicon Valley Bank has shown. For NBFIs, policy priorities include
monitoring leverage- and liquidity-related risks, developing macroprudential policy tools, and working
actively on closing data gaps.

Progress on the capital and banking unions remains paramount. The European Commission’s recent
capital market union legislative package for the first time includes steps toward harmonizing insolvency
processes across member states. Stronger insolvency frameworks would expand firms’ access to credit,
help banks resolve NPLs, promote entrepreneurship, and deepen European debt markets. It is also
important to make progress on finalizing the Banking Union, including the European deposit insurance
scheme, full ratification of the European Stability Mechanism treaty that would give a backstop to the
Single Resolution Fund, and the conclusion of the Commission’s Review of the Crisis Management
Framework.

Prepared by Luis Brandao-Marques, Lev Ratnovski and Sebastian Weber.

April 2023  •  INTERNATIONAL MONETARY FUND

28 REGIONAL ECONOMIC OUTLOOK—Europe

Box 6. (continued)

Box Figure 6.1. Europe: Common Box Figure 6.2. Europe: Bank
Equity Tier 1 Ratio, 2022:Q3 Liquidity Coverage Ratio, 2022:Q3
(Percent) (HQLA to net cash flow, percent)
25 250

20 200

15 150

10 100

5 50

0 0
HRV
Other EA
ISL
CZE
SWE
IRL
DNK
BEL
NOR
FIN
HUN
POL
UK
NLD
SVK
DEU
GRC
ITA
AUT
PRT
FRA
ESP

PRT
Other EA
ISL
HRV
FRA
ESP
IRL
DNK
BEL
HUN
ITA
FIN
CZE
AUT
NLD
UK
POL
NOR
DEU
SVK
GRC
SWE
Box Figure 6.3. Wholesale Funding Box Figure 6.4. NPLs and Stage 2
in Euro Area Banks Loans in Euro Area Banks
(Percent of total financial liabilities, (Percent)
June 2022)
40 Credit institutions 3.4 Nonperforming loans ratio 10.0
Other financial inst. Stage 2 loans
35 3.2 9.8
Nonfinancial corp. (share of total loans,
9.6
30 3.0 right scale)
9.4
2.8 9.2
25
2.6 9.0
20
2.4 8.8
15 8.6
2.2
10 8.4
2.0
8.2
5 1.8 8.0
0 1.6 7.8
2020:Q2

20:Q3

21:Q2

21:Q3

22:Q3
20:Q4

21:Q1

21:Q4

22:Q1

22:Q2
IRL
DEU

AUT
BEL

PRT
GRC
FRA
Other EA

ITA
NLD
ESP

FIN

Sources: Bank of England; Bloomberg Finance L.P.; European Banking Authority, Transparency Data;
ECB 2022; UK Office for National Statistics; and IMF staff calculations.
Note: Country abbreviations are International Organization for Standardization country codes. EA = euro
area; HQLA = high-quality liquid assets; NPLs = nonperforming loans.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 29

Annex Table 1.1 Real GDP Growth

(Year–over–year percent change; aggregation based on GDP in purchasing power parity terms)

Current WEO October 2022 WEO Difference

2021 2022 2023 2024 2022 2023 2024 2022 2023 2024
Europe 6.2 2.7 0.8 1.7 2.6 0.6 2.0 0.1 0.2 –0.3
Advanced European Economies 5.7 3.6 0.7 1.4 3.2 0.6 1.7 0.4 0.1 –0.3
Euro Area 5.4 3.5 0.8 1.4 3.1 0.5 1.8 0.4 0.3 –0.4
Austria 4.6 5.0 0.4 1.1 4.7 1.0 1.9 0.3 –0.6 –0.8
Belgium 6.1 3.1 0.7 1.1 2.4 0.4 1.4 0.7 0.3 –0.3
Croatia 13.1 6.3 1.7 2.3 5.9 3.5 3.0 0.4 –1.8 –0.7
Cyprus 6.6 5.6 2.5 2.8 3.5 2.5 2.6 2.1 0.0 0.2
Estonia 8.0 –1.3 –1.2 3.2 1.0 1.8 3.8 –2.3 –3.0 –0.6
Finland 3.0 2.1 0.0 1.3 2.1 0.5 1.1 0.0 –0.5 0.2
France 6.8 2.6 0.7 1.3 2.5 0.7 1.6 0.1 0.0 –0.3
Germany 2.6 1.8 –0.1 1.1 1.5 –0.3 1.5 0.3 0.2 –0.4
Greece 8.4 5.9 2.6 1.5 5.2 1.8 2.2 0.7 0.8 –0.7
Ireland 13.6 12.0 5.6 4.0 9.0 4.0 4.0 3.0 1.6 0.0
Italy 7.0 3.7 0.7 0.8 3.2 –0.2 1.3 0.5 0.9 –0.5
Latvia 4.1 2.0 0.4 2.9 2.5 1.6 3.4 –0.5 –1.2 –0.5
Lithuania 6.0 1.9 –0.3 2.7 1.8 1.1 2.8 0.1 –1.4 –0.1
Luxembourg 5.1 1.5 1.1 1.7 1.6 1.1 2.5 –0.1 0.0 –0.8
Malta 11.8 6.9 3.5 3.5 6.2 3.3 3.6 0.7 0.2 –0.1
Netherlands, The 4.9 4.5 1.0 1.2 4.5 0.8 1.7 0.0 0.2 –0.5
Portugal 5.5 6.7 1.0 1.7 6.2 0.7 2.4 0.5 0.3 –0.7
Slovak Republic 3.0 1.7 1.3 2.7 1.8 1.5 3.4 –0.1 –0.2 –0.7
Slovenia 8.2 5.4 1.6 2.1 5.7 1.7 3.0 –0.3 –0.1 –0.9
Spain 5.5 5.5 1.5 2.0 4.3 1.2 2.6 1.2 0.3 –0.6
Nordic Economies 4.8 3.1 0.4 1.5 2.9 0.9 2.1 0.2 –0.5 –0.6
Denmark 4.9 3.6 0.0 1.0 2.6 0.6 1.9 1.0 –0.6 –0.9
Iceland 4.3 6.4 2.3 2.1 5.1 2.9 2.6 1.3 –0.6 –0.5
Norway 3.9 3.3 2.1 2.5 3.6 2.6 2.2 –0.3 –0.5 0.3
Sweden 5.4 2.6 –0.5 1.0 2.6 –0.1 2.1 0.0 –0.4 –1.1
Other European Advanced 6.8 3.9 0.2 1.4 3.5 0.7 1.3 0.4 –0.5 0.1
Economies
Andorra 8.9 8.7 1.3 1.5 6.6 2.0 2.4 2.1 –0.7 –0.9
Czech Republic 3.6 2.4 –0.5 2.0 1.9 1.5 3.9 0.5 –2.0 –1.9
Israel 8.6 6.4 2.9 3.1 6.1 3.0 3.0 0.3 –0.1 0.1
San Marino 8.3 4.6 1.2 1.0 3.1 0.8 1.1 1.5 0.4 –0.1
Switzerland 4.2 2.1 0.8 1.8 2.2 0.8 1.8 –0.1 0.0 0.0
United Kingdom 7.6 4.0 –0.3 1.0 3.6 0.3 0.6 0.4 –0.6 0.4

April 2023  •  INTERNATIONAL MONETARY FUND

30 REGIONAL ECONOMIC OUTLOOK—Europe

Current WEO October 2022 WEO Difference

2021 2022 2023 2024 2022 2023 2024 2022 2023 2024
Emerging European Economies 7.3 0.8 1.2 2.4 1.1 0.5 2.5 –0.3 0.7 –0.1
Central Europe 6.9 4.9 0.4 2.6 4.2 0.8 3.1 0.7 –0.4 –0.5
Hungary 7.1 4.9 0.5 3.2 5.7 1.8 2.8 –0.8 –1.3 0.4
Poland 6.8 4.9 0.3 2.4 3.8 0.5 3.1 1.1 –0.2 –0.7
Eastern Europe 5.3 –4.5 0.4 1.3 –3.5 –2.1 1.5 –1.0 2.5 –0.2
Belarus 2.3 –4.7 0.7 1.2 –7.0 0.2 1.0 2.3 0.5 0.2
Moldova 13.9 –5.6 2.0 4.3 0.0 2.3 5.8 –5.6 –0.3 –1.5
Russia 5.6 –2.1 0.7 1.3 –3.4 –2.3 1.5 1.3 3.0 –0.2
Ukraine 3.4 –30.3 –3.0 . –35.0 . . 4.7 . .
Southeastern European EU 6.3 4.5 2.2 3.6 4.6 3.1 3.8 –0.1 –0.9 –0.2
Member States
Bulgaria 7.6 3.4 1.4 3.5 3.9 3.0 4.1 –0.5 –1.6 –0.6
Romania 5.9 4.8 2.4 3.7 4.8 3.1 3.8 0.0 –0.7 –0.1

Southeastern European 7.7 2.9 2.1 3.2 3.4 2.6 3.4 –0.5 –0.5 –0.2
Non–EU Member States
Albania 8.5 3.7 2.2 3.3 4.0 2.5 3.2 –0.3 –0.3 0.1
Bosnia and Herzegovina 7.4 3.8 2.0 3.0 2.4 2.0 3.0 1.4 0.0 0.0
Kosovo 10.7 2.7 3.5 3.9 2.7 3.5 3.9 0.0 0.0 0.0
Montenegro 13.0 6.4 3.2 3.0 7.2 2.5 3.0 –0.8 0.7 0.0
North Macedonia 3.9 2.2 1.4 3.6 2.7 3.0 3.9 –0.5 –1.6 –0.3
Serbia 7.5 2.3 2.0 3.0 3.5 2.7 3.5 –1.2 –0.7 –0.5
Türkiye 11.4 5.6 2.7 3.6 5.0 3.0 3.0 0.6 –0.3 0.6
Memorandum
World 6.3 3.4 2.8 3.0 3.2 2.7 3.2 0.2 0.1 –0.2
Advanced economies 5.4 2.7 1.3 1.4 2.4 1.1 1.6 0.3 0.2 –0.2

Emerging market and 6.9 4.0 3.9 4.2 3.7 3.7 4.3 0.3 0.2 –0.1
developing economies

Emerging Europe excl. 6.9 4.4 1.1 3.0 4.2 1.6 3.4 0.2 –0.5 –0.4
Belarus, Russia, Türkiye
and Ukraine
European Union 5.6 3.7 0.7 1.6 3.2 0.7 2.1 0.5 0.0 –0.5
United States 5.9 2.1 1.6 1.1 1.6 1.0 1.2 0.5 0.6 –0.1
China 8.4 3.0 5.2 4.5 3.2 4.4 4.5 –0.2 0.8 0.0
Japan 2.1 1.1 1.3 1.0 1.7 1.6 1.3 –0.6 –0.3 –0.3
Sources: IMF, World Economic Outlook (WEO) database; and IMF staff calculations.

INTERNATIONAL MONETARY FUND  •  April 2023

 Europe’s Balancing Act: Taming Inflation without a Recession 31

Annex Table 1.2. Headline Inflation

(Year–over–year percent change; aggregation based on GDP in purchasing power parity terms)

Current WEO October 2022 WEO Difference

2021 2022 2023 2024 2022 2023 2024 2022 2023 2024
Europe 4.8 15.2 10.4 6.3 15.1 10.6 5.1 0.1 –0.2 1.2
Advanced European Economies 2.5 8.4 5.6 3.0 8.3 6.2 2.9 0.1 –0.6 0.1
Euro Area 2.6 8.4 5.3 2.9 8.3 5.7 2.7 0.1 –0.4 0.2
Austria 2.8 8.6 8.2 3.0 7.7 5.1 2.5 0.9 3.1 0.5
Belgium 3.2 10.3 4.7 2.1 9.5 4.9 1.8 0.8 –0.2 0.3
Croatia 2.7 10.7 7.4 3.6 9.8 5.5 3.9 0.9 1.9 –0.3
Cyprus 2.2 8.1 3.9 2.5 8.0 3.8 2.1 0.1 0.1 0.4
Estonia 4.5 19.4 9.7 4.1 21.0 9.5 2.5 –1.6 0.2 1.6
Finland 2.1 7.2 5.3 2.5 6.5 3.5 1.8 0.7 1.8 0.7
France 2.1 5.9 5.0 2.5 5.8 4.6 2.4 0.1 0.4 0.1
Germany 3.2 8.7 6.2 3.1 8.5 7.2 3.5 0.2 –1.0 –0.4
Greece 0.6 9.3 4.0 2.9 9.2 3.2 1.6 0.1 0.8 1.3
Ireland 2.4 8.1 5.0 3.2 8.4 6.5 3.0 –0.3 –1.5 0.2
Italy 1.9 8.7 4.5 2.6 8.7 5.2 1.7 0.0 –0.7 0.9
Latvia 3.2 17.2 9.7 3.5 16.5 8.0 2.9 0.7 1.7 0.6
Lithuania 4.6 18.9 10.5 5.8 17.6 8.4 3.2 1.3 2.1 2.6
Luxembourg 3.5 8.1 2.6 3.1 8.4 3.7 2.3 –0.3 –1.1 0.8
Malta 0.7 6.1 5.8 3.4 5.9 4.6 2.6 0.2 1.2 0.8
Netherlands, The 2.8 11.6 3.9 4.2 12.0 8.0 2.7 –0.4 –4.1 1.5
Portugal 0.9 8.1 5.7 3.1 7.9 4.7 2.6 0.2 1.0 0.5
Slovak Republic 2.8 12.1 9.5 4.3 11.9 10.1 4.4 0.2 –0.6 –0.1
Slovenia 1.9 8.8 6.4 4.5 8.9 5.1 3.3 –0.1 1.3 1.2
Spain 3.0 8.3 4.3 3.2 8.8 4.9 3.5 –0.5 –0.6 –0.3
Nordic Economies 2.7 7.6 5.8 2.6 6.5 5.8 3.0 1.1 0.0 –0.4
Denmark 1.9 8.5 4.8 2.8 7.2 3.8 2.4 1.3 1.0 0.4
Iceland 4.5 8.3 8.1 4.2 8.4 6.7 4.1 –0.1 1.4 0.1
Norway 3.5 5.8 4.9 2.8 4.7 3.8 2.7 1.1 1.1 0.1
Sweden 2.7 8.1 6.8 2.3 7.2 8.4 3.5 0.9 –1.6 –1.2
Other European Advanced 2.3 8.4 6.5 3.1 8.6 7.6 3.2 –0.2 –1.1 –0.1
Economies
Andorra 1.7 6.2 5.6 2.9 5.3 2.8 1.9 0.9 2.8 1.0
Czech Republic 3.8 15.1 11.8 5.8 16.3 8.6 2.5 –1.2 3.2 3.3
Israel 1.5 4.4 4.3 3.1 4.5 3.6 2.5 –0.1 0.7 0.6
San Marino 2.1 7.1 4.6 2.7 6.9 4.5 1.5 0.2 0.1 1.2
Switzerland 0.6 2.8 2.4 1.6 3.1 2.4 1.5 –0.3 0.0 0.1
United Kingdom 2.6 9.1 6.8 3.0 9.1 9.0 3.7 0.0 –2.2 –0.7

April 2023  •  INTERNATIONAL MONETARY FUND

32 REGIONAL ECONOMIC OUTLOOK—Europe

Current WEO October 2022 WEO Difference

2021 2022 2023 2024 2022 2023 2024 2022 2023 2024
Emerging European Economies 9.7 30.2 21.0 13.9 30.9 20.9 10.2 –0.7 0.1 3.7
Central Europe 5.1 14.4 13.1 5.9 13.8 14.1 4.5 0.6 –1.0 1.4
Hungary 5.1 14.5 17.7 5.4 13.9 13.3 5.6 0.6 4.4 –0.2
Poland 5.1 14.4 11.9 6.1 13.8 14.3 4.3 0.6 –2.4 1.8
Eastern Europe 7.1 14.4 8.2 4.8 14.0 5.5 4.3 0.4 2.7 0.5
Belarus 9.5 14.8 7.5 10.1 16.5 13.1 11.7 –1.7 –5.6 –1.6
Moldova 5.1 28.6 13.8 5.0 28.5 13.8 5.0 0.1 0.0 0.0
Russia 6.7 13.8 7.0 4.6 13.8 5.0 4.0 0.0 2.0 0.6
Ukraine 9.4 20.2 21.1 . 20.6 . . –0.4 . .
Southeastern European EU 4.6 13.6 9.8 5.0 13.1 9.8 3.3 0.5 0.0 1.7
Member States
Bulgaria 2.8 13.0 7.5 2.2 12.4 5.2 2.2 0.6 2.3 0.0
Romania 5.0 13.8 10.5 5.8 13.3 11.0 3.6 0.5 –0.5 2.2

Southeastern European 3.2 11.9 9.2 4.2 10.6 6.5 3.6 1.3 2.7 0.6
Non–EU Member States
Albania 2.0 6.7 5.0 3.4 6.2 4.3 3.0 0.5 0.7 0.4
Bosnia and Herzegovina 2.0 14.0 6.0 3.0 10.5 4.5 3.5 3.5 1.5 –0.5
Kosovo 3.3 11.7 5.5 2.6 12.0 5.0 2.6 –0.3 0.5 0.0
Montenegro 2.4 13.0 9.7 5.0 12.8 9.2 4.5 0.2 0.5 0.5
North Macedonia 3.2 14.2 9.2 3.5 10.6 4.5 2.4 3.6 4.7 1.1
Serbia 4.1 12.0 12.2 5.3 11.5 8.3 4.2 0.5 3.9 1.1
Türkiye 19.6 72.3 50.6 35.2 73.1 51.2 24.2 –0.8 –0.6 11.0
Memorandum
World 4.7 8.7 7.0 4.9 8.8 6.5 4.1 –0.1 0.5 0.8
Advanced economies 3.1 7.3 4.7 2.6 7.2 4.4 2.4 0.1 0.3 0.2

Emerging market and 5.9 9.8 8.6 6.5 9.9 8.1 5.3 –0.1 0.5 1.2
developing economies

Emerging Europe excl. 4.8 14.1 11.7 5.5 13.5 12.0 4.1 0.6 –0.3 1.4
Belarus, Russia, Türkiye
and Ukraine
European Union 2.9 9.3 6.3 3.3 9.2 6.8 3.0 0.1 –0.5 0.3
United States 4.7 8.0 4.5 2.3 8.1 3.5 2.2 –0.1 1.0 0.1
China 0.9 1.9 2.0 2.2 2.2 2.2 1.9 –0.3 –0.2 0.3
Japan –0.2 2.5 2.7 2.2 2.0 1.4 1.0 0.5 1.3 1.2
Sources: IMF, World Economic Outlook (WEO) database; and IMF staff calculations.

INTERNATIONAL MONETARY FUND  •  April 2023